Brokers Fees and Rebating

From SMH i Believe

Mortgage brokers are using what they can to entice borrowers through the door, reports Michelle Innis.

A handful of brokers is rattling the billion-dollar property lending business by cutting the commission they get from banks and passing those savings on to borrowers.

The practice is not widespread, but at least three firms – Peach Home Loans, Refund Home Loans and wealth management firm Centrestone – are offering clients a rebate.

Peach offers $1000 on a $250,000 loan. Others use a sliding scale depending on the size of the loan and sometimes the discount they can get from the lender on the home loan interest rate.

“We can afford to do it because we don’t spend a lot on advertising, we don’t have a head office and we don’t pay high rents,” says Peach Home Loans’ chief executive, Nicholas Gruen. He says most of the firm’s mortgage brokers work from home offices.

“It’s like shopping at a discount store for a fridge as opposed to going to a department store in the central business district,” he says.

Centrestone has a slightly different approach. It is a wealth-management firm and, as such, lending is a small part of the income it might get from any one client.

Buying a home is one of the biggest decisions investors make, but it is not the only decision that can generate income for an adviser.

Whatever the business model, a broker rebating commission means borrowers walk away with less debt or more money in their pocket – and sometimes both.

And in Australia’s booming and highly competitive home lending market, it’s another tool to encourage borrowers in through the door.

Borrowers must ensure that when they select a broker they choose one with their interests at heart. A broker who “churns” borrowers through loans will too frequently end up costing the borrower money.

Home lending in Australia was $11.6 billion in May, down about $400 million from the previous month, according to the Australian Bureau of Statistics.

The property market has come off the boil, but that’s still a lot of loans, many sourced by mortgage brokers. As the home loan market has boomed, new lending products have proliferated and mortgage brokers have sprung up in every suburb.

Brokers mostly work independently of banks. Generally, they work with a wide panel of lenders to find the best mortgage. Sometimes, that means getting the lowest interest rate. But at other times, it can mean getting a loan with many features.

The bank pays the broker an upfront commission for introducing the borrower. This fee varies from bank to bank. The bank will also pay the broker a trailing commission for the life of the loan.

A broker who rebates commission usually gives part of the upfront fee to the borrower.

Gruen says Peach rebates from “both the upfront and the trailing commission”. He says not all the banks are happy about it. In fact, Peach does not offer loans from St George or ANZ.

“A few of the banks might have come under pressure from larger broking houses which are not happy about commissions being rebated,” Gruen says. “We don’t deal with all the major banks. But we do what we do to be competitive.”

Kieran Canavan, the head of the lending division at Centrestone, says his firm deals with all the major lenders. However, the average size of a Centrestone client’s loan is $800,000. You can assume that when you owe the bank that much money, the bank will provide a high level of service.

“We don’t rebate commission,” Canavan says. “But if we can get a better [interest] rate from a lender, then we reduce our commission. If we can’t get a better rate, then we don’t cut our commission.”

Canavan says on smaller loans, banks may be reluctant to deal with brokers who rebate because there may be a greater incentive for that broker to “churn” loans.

If a broker forgoes an upfront payment, he or she might look to move the client from bank to bank every 18 months to two years to increase the income from that client. But churning a client through loans is not productive for the bank or the borrower.

“We don’t move clients if the service is up to standard,” Canavan says. But part of Centrestone’s bargaining power with the banks is its wealthy client base. Banks and the wealth-management firm will take a holistic approach to a client with a lot of potential to generate income.

Phil Naylor, the chief executive of the Mortgage Industry Association of Australia, says he does not have a view on whether brokers should rebate commissions. “There are not very many who do it,” he says. “It’s just a way for different businesses to compete.

Industry researcher Denis Orrock, from InfoChoice, says: “It is a sales tool. Brokers who run with very low overheads can afford to do it.”

A spokesman for the Commonwealth Bank says whether brokers rebate or not is “an issue for the broker and their client, not the bank”.

And a spokeswoman for ANZ says the bank takes into account a range of factors before deciding whether a broker should be accredited, including regulatory compliance, customer service and staff training.

She says ANZ does deal with some brokers who rebate commissions.

Peach’s Gruen says borrowers should ensure they get the best deal by realising brokers are salesmen and women first and mortgage market experts second.

“A broker is not just trained in products,” Gruen says. “He or she is trained to sell.

“To get the best deal, see a couple of brokers and select one you think is honest.

“Hopefully, the consumer has done a bit of homework before they get to us. Just like when you buy a fridge. You know what you want. You want to get the best deal.”

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