Following the release of the recommendations of the banking royal commission, the mortgage broking sector could be facing significant changes to their operations in the near future. How will a limited access to mortgage brokers impact investors?
Kenneth Hayne's final report for the banking royal commission, focused mainly around access to mortgage brokers and lenders, prompting the government to review ‘borrower pays’ remuneration structure for mortgage brokers in three years. Currently, mortgage brokers provide a free service for Australian borrowers.
Experts unanimously believe that this change to a ‘borrower pays’ model would cause property investors to suffer as it limits their ability to secure competitive finance.
The Property Couch’s Ben Kingsley said: “It’s as clear as day in terms of the cost-effectiveness: Having competition in a marketplace meant that borrowers pay less. That’s a great consumer outcome.”
Borrowers themselves have been proven to favour the services of mortgage brokers through the Consumer Access to Mortgages Report, a study produced by Momentum Intelligence which shows higher satisfaction levels with Australians who use a mortgage broker versus those who go direct to a lender.
What difference do mortgage brokers bring to the property investment experience?
Momentum Media's Alex Whitlock had to learn the importance of working with a mortgage broker the hard way during the first time that he applied for a home loan.
“I’ve taken out probably 30, 40 mortgages over the years, and I’ve gone direct to the bank, too, but the first loan I ever took out was with a mortgage broker. This is why I’m here today still investing in property.”
For his first purchase, Mr Whitlock decided to buy an off-the-plan apartment in Hong Kong. Without adequate preparation, he rushed around and spoke to Australian banks in the country to secure the deal as soon as possible.
Assuming that his income was good enough and the property was a sound investment, he went to look for an 80 per cent loan – an application turned down by most of the banks.
As the date of settlement approaches, it became a ‘real panic’ moment for the investor.
“The developer said, ‘Have you thought about using a broker?’ I hadn’t got a clue what he was talking about but I was so desperate, I went, ‘Okay, line me up with a broker.’ A broker came over from, talked to me for three minutes, looked at my financials and went, ‘You’re going to get a loan.’"
“What was more interesting was she said, ‘I'll actually get a loan with ANZ’, to which I said, ‘But they’ve already knocked me back’. She goes, ‘Don't worry about that. That’s the people here. I know how to present your loan. I know how to present the documentation. You’ll get your loan’. It was approved,” Mr Whitlock said.
The efficiency of his first mortgage broker allowed him to continue his property investment journey for years to come.
“Mortgage brokers deal with borrowers all day, every day. They are sharp. You go to banks and you just have to educate them. Then, they try and sell you things that you don’t want. They just do this whole, ‘Let’s have a look at your whole financial situation.’ You go to a broker because you need a loan and they’ll give you want you want and they’ll do it effectively.”
The expertise of mortgage brokers built through years of experience provide greater options to borrowers, particularly those who are looking to expand their portfolio, according to Mr Whitlock.
In Momentum Intelligence’s Consumer Access to Mortgages Report, where they sought to compare two different channels for mortgage acquisition, they found that the satisfaction level for brokers hit 96 per cent whereas banks got 67 per cent.
Further, 95.8 per cent of those who have used a mortgage broker before said that they would use their services again in the future. Meanwhile, of all the participants that went direct to the bank or lender, only around 32 per cent would do the same thing.
Mr Whitlock highlighted: “If you've got 96 per cent of people who have gone through that channel and are phenomenally happy, it tells you a story about how dissatisfied people are with banks and how valuable having a broker there to open up options of lenders, injecting competition into the marketplace.”
“It’s not just about price, but it’s about product innovation. It’s about flexibility. It’s about tailoring things to a particular borrower’s needs for a specific property at a particular time.”
Both new and old borrowers benefit from the services of mortgage brokers as they work to expand the horizon for lending, both for old and new borrowers.
“If I’m a new arrival to the country, there might be 20 banks that don’t want to know me even if I come with computer science degree and five years working in Silicon Valley. But there could be a small or independent bank or a credit union who can give me a loan. That would have been hard to find if there wasn't that broker there helping me.”
While the age of technology has spurred the development of several tools that allow borrowers to access a wide array of information, being in touch with mortgage brokers allow them to dig deeper in terms of policies.
Their commitment to providing great outcomes for consumers allow them to give the best advice regarding the best lenders and the best deals.
According to Mr Whitlock: “What might happen is, a bank could have reached their capacity for a particular asset class today so they change their policy. Now, I don’t know that as a borrower, so I walk into a branch and someone go, ‘Yes, Mr. Whitlock, let’s go and fill the application in. Can I sell you a credit card as well?’ I put my application in and I get knocked back.”
“If, on the other hand, I go and see a broker, they will sit there and they know policy from 20 lenders at that particular time. If one bank has just moved out of the market and another one has come in, they’ll go, ‘Look, we’ll go with this second bank because they’re lending in this particular asset class.’”
“There are suburbs where lenders just go, ‘We’re done with that suburb for the time being’, and this is critical. I’m not only advocating brokers because I think that you get a better service, but it’s really just about getting that visibility. You can be steered in terms of where you’re going to get the right outcome.”
Knowing the benefits of having a mortgage broker, experts still strongly advise borrowers to be discerning when taking on a professional as part of their investment team.
With so much information publicly accessible, coupled with the softening of some of the biggest property markets nowadays, it is important to ensure that they are getting the best advice from the right people.
According to Mr Kingsley: “There's lending and then there’s strategy.”
“One of my first loans, I did go to a broker. However, that broker just focused in on price. They didn’t ask me if this property was going to be turned into an investment property later on. They didn’t tell me what an offset account could do.
“There is a difference between an average broker versus the investment-savvy broker, and it is chalk and cheese.”
“I'm pro-broker, but you’ve got to look around. You’ve still got to find the right provider because there’s some excellent brokers, there’s some that are okay and there’s one or two that aren’t really that good,” Mr Whitlock concluded.
Tune in to the special crossover episode between the Smart Property Investment Show and The Property Couch to know more about the future of mortgage brokers and how changes to regulations in that sector could affect property investors.