Mortgage broker commission and trailing fees rebate

Gidday Gibbo,

I'm not sure where you see the imbalance, although there seems to be some misunderstanding around my willingness to get this right. The moment a financial method was named, I embraced it, see above. It just needed the right name for me to get it.

I do apologise for not picking up on the conceptual references, however a specific reference to either NPV or DCF might have helped me catch it earlier. (I apologise again if there was one and I missed it). Let's face it, the anti mortgage rebate lobbyists have raised many issues to consider and I am just one person attempting to understand and respond to each of them along the way.

Nonetheless, the savings quoted are as close as we can get to objective data and this is what seems to be the major sticking point, as well as the rather bizarre concept that mortgage brokers offer a free service.

Importantly, I explored subjective measures such as quality of advice or service very early on and Alistair responded vigorously as have others, although to a lesser extent. My view arising from this input which supports other findings is that the ability for anyone to independently measure quality is difficult to say the least. However it should be noted that research has also included a secret shop arising from discussions with borrowers and brokers alike following my call for input.

Bottom line? I have not discovered or been offered any objective evidence that retail brokers offer better service or advice than rebate brokers. One of the few hard facts is that those unwilling to share their commissions grossly outnumber those who will, however as we all understand, it's about quality, not quantity.

This finding was supported in the secret shop, which actually found that of those shopped, the rebaters had a greater commitment to compliance than the retailers. Similarly, the structuring, comparison, lender panel and recommended solutions were as good and in some cases, arguably better.

In fact at least one of the mortgage rebaters has a dedicated, in-house loans processing and settlement team. They remain the only broker I know of that has taken the decision to separate sales from compliance and workflow.

So far, the only hard evidence offered by anyone in an attempt to support any theory  here (besides Dan42's very worthwhile input) was NAB's star rating, which is no use in supporting either side of the quality argument. Even then, there was an overtly misleading attempt to discredit this real information.

In addition to the information I have already posted in relation to this, it's worth noting that Rigoni is both experienced and a retail mortgage broker. I could reasonably argue a number of negative points about experienced, non rebating brokers with that case alone, however I haven't, because I am biased in favour of the borrower and they don't really need to know about it.

If you have objective data that can help clarify the situation, it would be more than welcomed. I extended the same offer to Alistair repeatedly in a bid to understand his calculations (to my knowledge, he never offered his solution). It turns out the confusion was simply one of nomenclature which was quickly resolved with the help of Dan42.

On statistics, I can't recall offering any, so perhaps you could quote them to me and I will check back through my notes where the information was sourced.

Remember, I am more than happy to receive new input, however they need to be independently verifiable and reasonably repeatable.

In the meantime, to help put the balance back in maybe something more like this?

Brokers that don't pay mortgage rebates say their service is worth the extra cost.

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, the $81,000 equates to around a $32,000 saving in today's terms. Which is still a nice saving.

Gidday Black Knight Mo…

A difficult read, but thanks for the input. Three quick corrections.
 
(i)   I am primarily concerned with the borrowers rights, everything else runs a distant second.
(ii)  I support mortgage brokers doing the right thing and believe they are important to providing competitive tension.
(iii) Lenders don't "feed me" nor mortgage brokers for that matter.

This thread was raised by a borrower who was simply asking for input on comparisons between mortgage broker offerings including those who pay mortgage rebates. 

You have raised some interesting subjects, but they are way off topic. If you raise new threads on regulation (any form), the emergence of borrowers agents or any of the other points you have introduced, please email me and I will happily join the discussion wherever it is worthwhile.

In the meantime, there are brokers out there who have the experience and systems in place that don't agree with your view. Borrowers too, one would suspect.  

The debate that ensued was a brimstone and fire affair from non-rebate brokers, with very little real data offered by the non-rebate consortium and none, which with careful examination, supported their position.

The only objective point raised was the method of expressing the rather extra ordinary savings of the mortgage rebate broker, so I attempted to strike a middle ground statement, which, through silence on the matter, seems to be accepted by all of::

Brokers that don't pay mortgage rebates say their service is worth the extra cost.

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, the $81,000 equates to around a $32,000 saving in today's terms. Which is still a nice saving.

Sorry Hans,

There doesn't seem to be any information on your site about mortgage rebates paid to the borrower.

The thread was started on this topic and the most recent discussion was around finding the right words to explain the benefit of this over retail brokers (See my last post)

Protect your interest!

Michael Lee

Gidday Singer,

That's fair enough too. Of course it's like saying

"I wouldn't dream of offering $32,000 below the asking price After all they've gone to the trouble of renovating and used their expertise to get the colours right… I'm not that good with colours"

No matter what your situation, if you're smart enough to choose property, then you're smart enough to get the mortgage right. In fact picking the right mortgage is a heck of a lot easier than picking the right property. I've had over twenty years experience doing both.

If you're happy to pay full price, there will always be people happy to take your money from you.

It's your money, your freedom and your journey.

Protect your interest!

Michael Lee

Gidday Singer,

Actually, now the analogy fits even better.
 
It is quite difficult, often costly and sometimes impossible for the average person to know whether that renovation is a quality one or not. It's not unheard of for great tiles to cover up atrocious structural workmanship, a glossy bench which is a wafer thin veneer over an old dodgy one and so on.

Despite your cynicism, it is possible for smart renovators to deliver a quality renovation for less than others can deliver a good looking, but altogether dodgy one.

Likewise, the assumption that rebating commissions leads to less service or a lower level of expertise is unprovable

Over the years, I have interviewed a number of investors with extensive investment portfolios, strong positive cash flow and equally strong nett worth. They certainly don't agree with you.

They, much like myself, want the best ROI they can get, mitigating the risk of not knowing by learning.

If you know enough to truly know the advice you are getting on 'structure' is good advice, then you know enough to structure your own loan then go and ask for the commission.

Regardless, each to their own.

If you are willing to buy an unprovable idea for $32,000 then there will always be someone there to sell it to you.

Protect your interest!

Michael Lee

Gidday Terry,

During this post, I have asked for a way of objectively measuring the quality of the broker so that borrowers would then be better able to understand why some charge $81,000 more over the life of a loan than others.

The assumption that you and others like you continue to rely on is that if you pay the highest price, you must be getting the best, which, whilst it might be true for some things, simply is not for most.

For example if you found the Kohler bath tub you wanted at $2,500 from one retailer, then the same tub down the road for $2,000, would you seriously pay $2,500?

This is identical to the retail brokers versus mortgage rebate broker situation, only we're not talking $500, we're talking $31,000!

Of course the next thing brokers and their ilk head for is 'experience' or 'skill'. I have also previously raised that a person who just got their certificate, is writing their first loan and who doesn't even have a mortgage themselves charges the same commission as your 'top' broker. 

I have and continue to ask for objective measures that demonstrate the value for money proposition. I'm still open to learning and I am seriously interested in hearing sensible ideas when you find the time to put them forward.

In the meantime of course, I understand that people like Singer are not only entitled to, but want to pay an extra $81,000 ($31,000 p.v.) for that unprovable notion
 
It's just that prudent and enquiring people won't.

Protect your interest!

Michael Lee

Gidday Terry,

What a coincidence, I have actually used that exact analogy in my book!

However with brokers it's more like you’re paying the Prosecution who is bribing the barrister who is meant to be defending you. Add to that the question of whether they are even qualified to offer that advice in the first place and well….

It seems we agree that if you are going to get advice, you should pay the right professional to do the right job.

So the smart solution is to use an IFAAA financial advisor to manage your risk and financial plan; a borrowers agent to structure and shop, then a broker paying mortgage rebates to cover your costs of professional, pro-you advice. All in all that would take about 30 mins extra of your time, you get professionally apporopriate advice and triple the professionals to sue or complain about if things go wrong. All for well less than you'll pay through a retail mortgage broker.

You can then use mortgage rebates to cover the costs of pro-you, not pro-broker advice. Getting the right advice would hardly put a dent in the $31,000 p.v. savings you will get from mortgage rebates.

Protect your interest!

Michael Lee

It's a debate no-one will win.
For investor clients, I only use a fixed fee for service model and rebate back the upfront commission I receive (net of GST).

I provide a long term strategy plan, documentation and folder that outlines what they need to do to achieve their goals based on building a property portfolio, that is what they pay for and if they use me as a mortgage broker, I rebate that upfront commission back. Trail is just too messy.

The reason I moved to that model was two fold, it is a unique selling proposition and it takes away the perception of bias, either lender or loan size. Not all clients decide to use my service, most do as there is an real dollar after tax benefit for them in what I provide in most instances, ignoring the benefit of the strategy plan.

It will be a long road before most brokers go down the upfront fee model as unless they can demonstrate their service offering outweighs the additional cost to a customer, customers will simply go to a branch to get the same loan (presuming they know what the product/s should be and how it should be structured) at no cost. I cannot see banks differentiating interest rates in favour of brokers to make it easier for brokers to offer that upfront fee instead.
Greg

After years in the industry i do find some of the comments on hear quite funny.. Just because of a few bad apples the whole industry suffers!

My first question to you all is how do you value great advice?

The industry has been scaled and gutted my friend with all the accreditation you need these days its becoming a joke. I have no aspiration to become a financial planner but this is the way it is heading! I have NO issue with being accountable for my advice or disclosing the commissions received, but how much is too much??? On top of this commissions have been halved down to 0.4% plus GST in up-fronts with trails being almost non existent for the first 12 months with most banks.

We deal with residential, investment, business and commercial development finance on a daily basis. I have seen many so call professionals and moreso bank employees tie clients up soooo tight that they cannot get out of their current situations without loosing a property or two due to the banks hard lines. These clients have more equity than you can dream about but because of imbeciles like this they cannot access it to continue moving forward.
I believe this is caused by the banks making it harder for brokers to earn money, requiring higher sales (loans written) and so called refund brokerage firms. At the end of the day brokers have to eat too! You don't go somewhere and pay for a carton of milk or movie ticket etc and ask for 50% refunded, its like selling a car for 10k and asking for 5 back… How do businesses survive like this?

Personally i feel broker commissions should be done away with altogether and a service fee should be charged instead. Just like an accountant, solicitor, plumber, electrician etc that way you have the fees disclosed upfront.

That's my 2 cents worth, but in closing you get what you pay for either way and cheapest always ends up costing you more down the track!!!

Good question Trent and this is one of the points I raised somewhere way back in the beginning!

I don't agree that commissions should be done away with in any form as they do give consumers access to service they may not be able to otherwise afford and, if consumers use a refund broker they can also access these commissions for savings (especially those brokers sharing trail commissions).

Your idea of a fee for service model is a good one and already in existence in the mortgage industry by way of borrowers agents, it's just not as widespread or well known at this stage, however as professionals like yourself start to realise the commission conundrum and become determined to do something about it, then that will change over time.

Borrowers agents do not take commission and if they receive it, they simply pass it back to the borrower 100%. Now that's what I call a mortgage professional.