The 18% figure is misleading, because people don't repay JUST the $450,000, they repay about $1.1 million, if the loan goes the full 30 years.
The percentage of savings you calculate should be based on the total repayments. Or, calculate the amount if interest saved.
Thanks Dan42,
I appreciate your perspective, however you will see me state time and time again that it is expressed as a portion of the loan amount. If these two ideas became separated somewhere along the way, I apologise.
As a point of clarification, the retail cost of this home loan (ie. fees and charges) adopting the variables above is $651,417.
This means borrowers can reduce the amount of interest and fees they pay by around 12.55% using the ORP mortgage broker over going retail.
Again, I would like to point out that I have not modelled at the higher final trail rate, so savings in this example would be greater again. I'll rework the model to include Year 6+ trails and provide a more accurate saving for this borrower scenario when I have a mo.
Thanks for the feedback, I'll watch my messages as there I have n intention to mislead because borrowers deserve the truth.
That would be 'n' as in 'no' intention to mislead.
mortgagedetective wrote:Gidday Alistair,I presume you are referring to the savings to the borrower of 18% in the above example (actually it's probably higher as I didn't model the 6 year+ step in because NAB – Homeside are the exception as you know.)
If so, I'm not sure what you don't understand as this is the same basic modelling you would need to use to get to make recommendations to borrowers on any loan (assuming cost factors in your recommendation somewhere).
To get the savings, model mortgage rebate cost on:
– Loan Amount $450,000
– Monthly P&I (Interest only savings would be far more significant)
– Term 30 Years
– Normalise the interest rate +2% (because SVR has averaged at around 7.10% since April 1994)
– 1st rebate at settlement + 3 months (because it is unlikely to happen on the day of settlement)
– 100% of trail rebated monthly to the loan account (I know you disagree that borrowers should do this, but it saves interest and is what borrowers I interviewed prefer to do)Then;
(Retail Cost – Mortgage Rebate Cost) / Original Loan Amount x 100
As per my note, NAB Homeside savings are over 18% of loan amount for borrowers who take their loan via an ORP mortgage broker over brokers that keep the commission for themselves although again, I maxed the out years at 0.30% p.a. when it actually steps to 0.35%. ie, mortgage rebate savings will be much larger.
Let me know if you are struggling and I will help out.
By my calculations (using 0.5% upfront and 0.15% trail, as these are far more representative of what brokers generally are paid) if all commissions are rebated and paid into the loan there is a saving of around $60K over 30 years against repayments of almost $1.1 mill. Even without taking into account the time cost of money, which is necessary if you are using a 30 year period, this saving is relatively small. If you really do wish to "cut through the baloney, you should use statistics in their proper context. Calculating a dollar saving over 30 year and comparing it agains the initial size of a loan is meaningless and the percentage figures you continue to use a misleading in the extreme.
You also need to be more clear when you are using the term "offset". Paying money into a loan reduces interest by reducing the loan amount, it does not "offset" anything. Paying money into an offset account reduces interest by offsetting what is charged against an unchanged loan amount. This difference is very important.
Gidday Alistair,
Borrowers interested in saving the 18% of loan amount (or 12.55% in interest and fees) can see the mortgage rebates they receive form at least one ORP mortgage broker paying them here:
http://www.matesratesmortgagebrokers.com.au/mates_rates_mortgage_broker_commissions.html
I am unsure of your motivation, however you are misrepresenting both the commissions paid and the effect of the savings.
As previously explained, my modelling is based on the rates and rebate cash flow timings that borrowers can and do receive in real life cases. Knowledgeable borrowers have been making these savings for the better part of a decade.
I believe the investment theory you are attempting to name is 'Time value of Money', which is impossible to address in a dollar based saving calculation
However, it can be demonstrated using an internal rate of return which is also the basis of the MCR legislation. There are problems with using IRR because the loans wind up with different terms (i.e. the rebated loan pays out faster).
In the case of the $450,000 this would be demonstrated by:
– Retail AAPR: 7.22% for 30.0 Years
– Mortgage Rebate AAPR: 6.98% for 27.8 YearsIn simple terms, the mortgage rebate borrowers loan has a lower effective rate whilst they remain in debt, BUT they also become debt free 2.2 years sooner. The borrower taking retail has over two extra years of repayments at the higher rate of 7.22%.
This demonstrates the shortfall of Time Value of Money is it does not allow for the added value realised by borrowers through becoming debt free 2.2 years sooner. This becomes an invaluable benefit.
In terms of the offset, you may recall my earlier post when I stated borrowers either put the money in actual loan or a 100% offset facility, so I think you are just being a little mischievous here.
Of course none of this changes the reality that a borrower with this scenario is saving the 18% of loan amount (or 12.55% in interest and fees) by using a broker paying mortgage rebates over one that doesn't.
mortgagedetective wrote:Gidday Alistair,
Borrowers interested in saving the 18% of loan amount (or 12.55% in interest and fees) can see the mortgage rebates they receive form at least one ORP mortgage broker paying them here:
http://www.matesratesmortgagebrokers.com.au/mates_rates_mortgage_broker_commissions.html
I am unsure of your motivation, however you are misrepresenting both the commissions paid and the effect of the savings.
As previously explained, my modelling is based on the rates and rebate cash flow timings that borrowers can and do receive in real life cases. Knowledgeable borrowers have been making these savings for the better part of a decade.
I believe the investment theory you are attempting to name is 'Time value of Money', which is impossible to address in a dollar based saving calculation
However, it can be demonstrated using an internal rate of return which is also the basis of the MCR legislation. There are problems with using IRR because the loans wind up with different terms (i.e. the rebated loan pays out faster).
In the case of the $450,000 this would be demonstrated by:
– Retail AAPR: 7.22% for 30.0 Years
– Mortgage Rebate AAPR: 6.98% for 27.8 YearsIn simple terms, the mortgage rebate borrowers loan has a lower effective rate whilst they remain in debt, BUT they also become debt free 2.2 years sooner. The borrower taking retail has over two extra years of repayments at the higher rate of 7.22%.
This demonstrates the shortfall of Time Value of Money is it does not allow for the added value realised by borrowers through becoming debt free 2.2 years sooner. This becomes an invaluable benefit.
In terms of the offset, you may recall my earlier post when I stated borrowers either put the money in actual loan or a 100% offset facility, so I think you are just being a little mischievous here.
Of course none of this changes the reality that a borrower with this scenario is saving the 18% of loan amount (or 12.55% in interest and fees) by using a broker paying mortgage rebates over one that doesn't.
The commission rates I used of 0.5% upfront and 0.15% trail is pretty representative of what a broker earns on average, I'm sure the other brokers on here will back me up on this.
With regard to your comment regarding the time value of money, It is not impossible to model you simply apply a discount rate on the saving accross the time period. Estimate average inflation and drag the discount across the spread sheet. If you wish to compare savings over 30 years to a figure today you simply have to do this or else your figures are meaningless. Alternatively, compare the savings against the cost over the 30 years, which is closer to $1.1 mill. Claiming an 18% saving is misleading and you know it.
As to my motivation, it is to "cut through the baloney".
One area that i agree with is that it would be good if broker commission was agreed on between client and broker, but the only way this would work would be if the banks delivered loans to brokers with the current commissions discounted off the rate and allowed the broker to add it back at an agreed rate. This will never happen as it would kill the branches, who struggle to compete with brokers as is.
Thanks Alistair,
The 18% saving on the $450,000 NAB/Homeside loan from mortgage rebate over retail has always been expressed as a percentage of the loan amount and calculated using real data. Although there has been plenty of allegation, nobody in this post has demonstrated the figure to be incorrect using real data.
When comments were added that this may be misleading, I then recalculated the savings on actual costs (i.e. interest and fees). The result is a 12.55% saving on retail broker costs by using a rebate broker.
The formula for this is pretty straight forward and universally accepted in other industries i.e:
(Retail Cost – Reduced Retail Cost) / Retail Cost x 100
This is the same formula consumers would encounter everyday whenever they see a promotion offering 5% off, 10% off or in the case of the $450,000 homeside example, 12.55% off.
I again recalculated the results after you introduced an investment principle that I guessed to mean the Time Value of Money, which is quite well documented and which is also embedded into our own Mandatory Comparison Rate legislation and formula. I produced the savings for you on this basis including explanatory notes as to why this approach has some issues.
Once again, mortgage rebate brokers came out with a lower effective rate and a shorter loan term.
– Retail AAPR: 7.22% for 30.0 Years
– Mortgage Rebate AAPR: 6.98% for 27.8 YearsThese figures include the Time Value of Money using globally accepted methodologies and formula. Your approach, whilst interesting, does not. However, if you would like to email me your spreadsheet, I can arrange for it to be audited and documented. I would then be more than happy to include the results in my future posts and publications.
With respect to your claims surrounding the $1.1m figure, it is important to understand this amount includes the repayment of principle ($450,000) which is a cost of the investment rather than a cost of money.
Whilst professional investors include principle and capital costs in ROI calculations for a given investment, it is inappropriate to double dip them in the cost of money savings calculations. Principle is a fixed amount that must be paid regardless of financing decisions.
It is important to recognise that I used actual, documented rates of commission/rebate to calculate a borrowers savings, rather than a guess at an average from a pool of brokers that seem steadfast against the idea of borrowers getting a share of commissions.
However I am reassured that you are thinking about ways to address the commission dilemma and it's probably no surprise that I disagree with your statement that there is only one way to do this.
If you are seeking a greater level of transparency and flexibility to set your own costs, their are a few other ways you can do that, at least two of which are gaining acceptance. I provide consultancy to a number of businesses implementing these exact models:
1. Agree your fee with the client and do not collect commissions (i.e become a Borrowers Agent rather than a broker).
2. Agree your fee with the client and refund 100% of whatever is left over from the commissions.
3. Agree your fee with the client, charge that to them and refund 100% of all commissions.Each of these models is focused on delivering better results to the borrower. Anyhow, there's some food for thought and probably the subject for another post.
Putting all that aside and coming back to the original post, one of these models already available, really tackles some of the conflict of interest troubles that plague traditional mortgage brokers.
Of course it also delivers borrowers a 12.55% saving on retail broker costs by using a broker that pays borrowers mortgage rebates.
mortgagedetective wrote:The 18% saving on the $450,000 NAB/Homeside loan from mortgage rebate over retail has always been expressed as a percentage of the loan amount and calculated using real data. Although there has been plenty of allegation, nobody in this post has demonstrated the figure to be incorrect using real data.
There has never been an argument that the p[otential dollar saving is anything but what you have stated if you use Homeside as an example. The argument is whether the comparison to initial loan amount is a good one, and also whether companies that rebate are able to offer a level of service that warrants the saving.
mortgagedetective wrote:With respect to your claims surrounding the $1.1m figure, it is important to understand this amount includes the repayment of principle ($450,000) which is a cost of the investment rather than a cost of money.This is true and is a good reason why comparing the saving to the initial loan amount is meaningless.
mortgagedetective wrote:However I am reassured that you are thinking about ways to address the commission dilemma and it's probably no surprise that I disagree with your statement that there is only one way to do this.If you are seeking a greater level of transparency and flexibility to set your own costs, their are a few other ways you can do that, at least two of which are gaining acceptance. I provide consultancy to a number of businesses implementing these exact models:
1. Agree your fee with the client and do not collect commissions (i.e become a Borrowers Agent rather than a broker).
2. Agree your fee with the client and refund 100% of whatever is left over from the commissions.
3. Agree your fee with the client, charge that to them and refund 100% of all commissions.Each of these models is focused on delivering better results to the borrower. Anyhow, there's some food for thought and probably the subject for another post.
If you want to have a go at brokers over c ommissions, I'm not a good target for you because a very high percentage of my income comes from commercial and business loans where I nominate the level of payment I receive to the lender and it is fully disclosed to the borrower. I think it would be great if this was the way resi loans worked also, but its not going to happen because the banks won't deliver loans to broker clients for lower rates than they do to branch clients and clients wonm't accept paying more to go through a branch than a broker. The business models you have suggested above will never work, except as a niche area, because if they did become widespread banks would simply lower commission further.
Gidday Alistair,
Gosh I wish that came out sooner. So we are agreed the best way to state the saving (for the $450,000 homeside example) is:
"a saving of 12.55% in interest and fees which equals $81,000 over 30 years"
In relation to Daniel's original question – "Is this one of those cases where 'you get what you pay for", it seems we can also agree then that borrowers should weigh up whether the service offered by non-rebating brokers/the lender directly is worth an extra $81,000.
Daniel as I understand it, went to MyRate and as a result, paid and will continue to pay more than if he had sourced an ING genuine loan from a broker paying mortgage rebates. This is likely to amount to tens of thousands more than he would be paying if he understood the concepts more thoroughly.
Although I am, strictly PRO-Borrower, this does not make me Anti-Mortgage Broker.
I believe Mortgage brokers are themost important industry player to maintain competitive tension between lenders.
I also believe that brokers are entitled to charge for their services providing all fees are is disclosed in such a way the borrower properly understands it.
i.e. borrowers paying an extra $81,000 (yes, over 30 years) shouldn't really be called a free service, should it?
Michael,
Just something a bit of topic. Assuming all brokers charged an upfront fee for the service and rebated 100% of the commission. How long do you think banks would keep commissions for?
If banks stopped paying commissions do you think that borrowers will receive a cheaper rate?
How many borrowers may go with the cheapest upfront fee and get into the wrong product for their situation?mortgagedetective wrote:Gidday Alistair,
Gosh I wish that came out sooner. So we are agreed the best way to state the saving (for the $450,000 homeside example) is:
"a saving of 12.55% in interest and fees which equals $81,000 over 30 years"
No, because brokers are not selling a commodity, if they are any good. They are selling a service and c ustomers are lucky enough that the banks will pay for it, rather than them having to. The cost is not therefore only in the direct cost of the loan. This is even more the case for investors an d people with more complex borrowing needs. The other problem is that most people don't have the knowledge to attach a time value to the saving, the saving of $81K is not worth $ 81K in real terms. It is a good marketing statement though.
Gidday Gibbo,
Wow, dare to dream! Savings through those brokers could balloon well beyond the $81,000 (over 30 years) for that Homeside Loan.
Good questions and who knows the answer to the first one (how long). However, you could look toward the UK for your answer – having said that, they are different markets.
On question 2, I don't believe for even the briefest of moments that lenders would unilaterally pass commission 'savings' directly to borrowers in the form of rate cuts or fee concessions. There is only very limited evidence that this would occur (i.e. One Direct vs ANZ, however these offerings are not identical).
On question 3, borrowers THINK they are choosing cheapest fee now, which is why brokers are so keen to market their service as 'free' – $81,000 on $450,000 over 30 years – Yikes yes, free, no.
Perhaps some of your questions are best posed to borrowers such as Daniel who started this post. I believe he went with MyRate after arguably being driven, at least in part, by the disinformation and contempt lavished earlier in the post by you guessed it, non-rebate mortgage brokers. As a result, whether Daniel realises and/or wants to acknowledge it, he is paying a great deal more for less (nobody wants to admit they have an ugly baby).
However that doesn't have to remain the case if borrowers are encouraged to consider the costs of their decisions more carefully; are armed with easier to understand information and of course, professionalisation of the mortgage advice sector is ever embraced. (i mean professional advice vs professional sales.)
As I posted earlier, I think there is room for a range of models and whilst that diversity exists, it is certainly much harder for lenders to go one way or the other.
Again, diversity coupled with honesty is the key.
This post is all about clearing the air on at least one point:
Would a borrower knowingly pay an extra 12.55% in interest and fees for the identical loan through one broker who doesn't pay rebates over the one which does?
Michael, if you want to have any credibility stop claiming BS figures for savings like 12.55%, you know very well the saving is far less than this in real terms.
Also, please explain how a brokers services are not free when they get the same terms for the same loan, be it through a branch or broker. Banks have a cost of client acquiisition be it advertising, paying for branches and sales people or selling through the broker channel. Together they are a cost to the bank and are passed on to the banks customers, as are all the other myriad of costs they incur. It suits your argumement to seperate the cost of broker commissions from the rest, and claim the service it not free, but it is not reality.
I was going to type a long reply but will save my breath. I cant see this thread improving
Gidday Alistair,
By BS I hope you mean Blooming Significant and I agree, a 12.55% saving in interest and fees is exactly that.
I have explained the methodology and the assumptions and also factored in the time value of money. I'm not sure why you have struggled so intensely with the calculation. It's just math. Again, if you send me your spreadsheet, I'll get it independently audited and incorporate the results in future posts and publications.
Although I'm lost on your motivation, I understand that you are less than enthusiastic about brokers offering such generous support to borrowers through mortgage rebates, but nobody is forcing you to be as decent with your borrowers.
On your confusion around what free means, I'll go to the Australian Oxford Dictionary again which defines free as ' available without charge, costing nothing'.
So borrowers paying an extra $81,000 (over 30 years) for the identical loan through a non-rebate broker versus the same loan from the rebate broker doesn't really fit the dictionary definition of free, does it?
What Alistair is saying is that the saving is over 30 years, so it is not worth $80k in real terms. My hurried Discounted cashflow analysis, at a rate of 8% suggets it is more like $32k in todays money.
Still nice, but not as nice as 80k.
mortgagedetective wrote:Gidday Alistair,Although I'm lost on your motivation, I understand that you are less than enthusiastic about brokers offering such generous support to borrowers through mortgage rebates, but nobody is forcing you to be as decent with your borrowers.
quote]
My motivation is that people like yourself, who treat mortgage broking as a commodity loan processing business, do a lot of harm to the industry and certainly don't do any favours to borrowers. Good advice is worth a lot more than the fractional saving they can make by receiving rebates on comissions, this is particularly the case for investors whose major issue is often access to funds.You can argue till the cows come home about how the exact same loan will cost less through a rebater, but this is stating the bleeding obvious. The way you word your arguments creates the impression of there being significantly higher savings than are possible, I can only guess that you continue to do this to push your own barrow.
Your inference that brokers who don't rebate are somehow not doing the correct thing via their customers is incredibly naive, as you know nothing about the needs of my, or any other brokers clients. Did you ever stop to think that maybe some brokers provide a really good service and that their clients are happy for them to be paid well. Perhaps when you were involved with the previously mentioned rebater, if you had provided a better service you wouldn't have had to compete on price.
Gidday Dan42,
Thanks for the clarification – one of those Ah-huh moments.
I hadn't made the DCF connection, partly because I question the applicability of it for this purpose (i.e. what rpr works given the situation actually being modelled) and partly because it never came up :o(
However, I agree that it is another valid method of modelling results and even with those assumptions, also agree that $32,000 is nice.
mortgagedetective wrote:Gidday Dan42,I hadn't made the DCF connection, partly because I question the applicability of it for this purpose (i.e. what rpr works given the situation actually being modelled) and partly because it never came up :o(
You have to be kidding me, you continue to compare a saving over 30 years to a day one figure (the initial loan figure is not a reasonable figure to use any way, because it is not the cost of the loan) and you don't think it is applicable to discount the future savings? Also, it has been brought up continually, you just choose to ignore it so you can stick to your exagerated and deceptive claims regarding possible savings.
mortgagedetective wrote:However, I agree that it is another valid method of modelling results and even with those assumptions, also agree that $32,000 is nice.Gidday Alistair,
You missed the important detail acknowledging results from an npv via dcf calculation – the method which I think you were attempting to explain (thanks again for short circuiting that Dan42).
I understand that you personally don't want to offer the $32,000 saving to your clients – however that does not invalidate that mortgage brokers, more generous than yourself, do.
It follows that borrowers should be aware of the opportunity of making the saving.
I hope this clarification helps in relation to the Homeside loan. It's broken into two parts, the every day approach that will be commonly understood by most and an NPV calculated by Dan42 to deal with your concerns as well:
Borrowers will pay an extra $81,000 over 30 years in interest and fees for the identical loan through a broker who doesn't pay rebates over the broker who pays mortgage rebates.
Using discounted cash flow modelling, this equates to around a $32,000 saving in today's terms for the making the same repayments on an identical loan, from the same lender. Which is still a nice saving.
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