Consumers are being put at a disadvantage because of a lack of price transparency in the mortgage market, according to the latest Australian Securities and Investments Commission review of the sector.
In a report released last week, “Looking for a mortgage: consumer experiences and expectations in getting a home loan”, ASIC says consumers need greater price transparency and better information from brokers and lenders overall if they to make informed decisions.
“We believe that some consumers are likely taking out loans when cheaper alternatives exist,” the report says.
The regulator has also called on brokers to demonstrate that they are meeting consumer expectations and presenting them with the best value loan options.
ASIC followed 300 consumers in the process of taking out a home loan and it surveyed 2000 consumers who either had recently taken out a home loan or were in the process of doing so.
Consumers typically said they were looking for the “best” home loan, which usually refers to price and rate. When they went to a broker, this is what they expected the broker to deliver.
In the survey, ASIC found that 60 per cent of consumers took out a home loan with a lender with which they had an existing relationship. The strongest factor influencing their decision was convenience.
A consistent feeling among consumers was that they were disappointed that their lender did not offer a reward for loyalty. If consumers wanted a lower interest rate they had to ask for it and this was often with mixed results.
Consumers who went to brokers tended to be first home buyers and people with less knowledge about the home loan market.
Based on the survey, 58 per cent of consumers received just one or two loan options from their broker.
It was not always clear that brokers had presented a loan recommendation or options in a way that enabled consumers to understand the objective criteria behind the recommendations of the specific loan or loans.
The review identified some instances where consumers felt brokers may have been pushing a certain product that may not have been in their interest.
Twenty-one per cent believed they could have got a better interest rate or were not sure whether they got a good rate.
One in 10 consumers who had recently taken out a home loan and had started making repayments were either struggling to make their repayments or had missed a payment.
ASIC said this appeared to be a relatively high proportion of consumers self-perceiving a level of financial pressure within 12 months of entering into a home loan.
Consumers’ understanding of how mortgage brokers were paid varied considerably. Most consumers appeared to be aware that a broker was paid by a lender through a commission payment. But it was not always clear that the consumers understood that a broker is likely to receive different commission payments based on the lender selected and that this presented a conflict of interest.
ASIC’s latest review follows a much more critical review of the mortgage broking sector in 2017 and an extensive section on mortgage broking in last year’s Productivity Commission review of competition in retail financial services.
In its 2017 review ASIC said: “The standard model of upfront and trail commissions creates conflicts of interest.” It identified two sources of conflict:
- Product strategy conflict. A broker could recommend a loan that is larger than the consumer needs or can afford, to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that a consumer can borrow (for example, through the choice of an interest-only loan).
- Lender choice conflict. A broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer.
ASIC reported that brokers did not make sufficient inquiries into consumers’ expenses and that they relied heavily on the HEM benchmark when preparing applications.
It found that loans through brokers were more likely to have gone into arrears and that consumers with loans through brokers made less additional payments on loans.
ASIC’s consumer research indicated that many consumers consider that brokers give them a better deal than going to the lender directly. “The data we obtained did not show a consistent trend that brokers obtained either cheaper loans or more expensive loans,” it said.
The Productivity Commission report said that “the competition benefits of mortgage brokers have become compromised.”
It said: “Mortgage brokers, who once revitalised price competition and revolutionised product delivery, have become part of the banking establishment. Fees and trail commissions have no evident link to customer best interests.
“The major banks have not only survived the emergence of the broker model, they have leveraged their market positions to make it their own. The major banks source around 40 per cent of their loans through brokers and account for just over 60 per cent of the total loans that brokers generated.”
The Productivity Commission argues that large financial institutions have achieved that state with persistently opaque pricing, conflicted advice and remuneration arrangements. Opaque pricing is a significant factor in keeping consumers unsure of their position and more dependent on advice.
“Our primary concerns about broker remuneration, from a competition perspective, include that recovery of such payments by lenders may be imposing additional costs on all home loan borrowers, and that current structures are at time highly likely to motivate brokers to act in way other than in the consumer’s interests.
“Trail commission have the effect of aligning the broker’s interests with those of the lender, rather than those of the borrower.”
The Productivity Commission report echoed ASIC’s review when it said: “While many consumers believe that mortgage brokers can secure them a lower interest rate, interest rates on home loans obtained through brokers are not significantly different to those obtained directly from lenders.”