Mortgage brokers overpaid and adding 16 basis points to every loan: UBS report

Mortgage brokers are adding 16 basis points to a borrower’s cost on every home loan they write, or an average $4,600 commission on a loan, says new research by investment bank UBS.

Nearly $2.5 billion was paid as commission to mortgage brokers by banks in 2015, which is about a quarter of the total cost of running their personal lending operations, UBS analysts John Mott and Rachel Bentvelzen said in the research cited by The Australian Financial Review.

The news comes at a time when banks have been levied with a $6.2 billion tax in the recent federal budget and regulators are reviewing potential conflicts of interest in the way mortgage brokers are remunerated for their services.

The share of new home loans originated by mortgage brokers had risen from below 40 per cent in 2012 to just under 50 per cent in 2016, according to Fitch banking analyst Tim Roche, the AFR reported.

As banks face rising cost pressures while the industry's remuneration structures are under review, these costs will inevitably fall, the analysts said in a note titled "Are mortgage brokers overpaid?"

The average commission was $4600 per mortgage, which the analysts said was "disproportionate for advice provided on a simple, commoditised, single product".

That was especially the case compared to fees charged by financial advisors for "simple advice" ranged from $200 to $700, UBS said.

Broker commissions summed to $2.4 billion in 2015, an 18 per cent per annum increase from $1.5 billion in 2013 and equated to nearly a quarter of the $10.6 billion cost of running the entire consumer and personal lending operations of a major bank, UBS said.

UBS said the cost of mortgage brokers was born by all borrowers and calculated that the sum of commissions added 16 basis points per annum to the $1.5 trillion of all outstanding mortgages.

"Although mortgage broker commissions are paid by the bank, not the customer, commissions are factored into the bank's cost of funding and have been a driving factor in mortgage repricing in recent years."

These payments, UBS said, "are an illustration of excesses built into the financial system following a 26-year economic boom," and they expect them to fall over time.

"We believe the current quantum of economic rent being extracted by the mortgage broking industry is unrealistic and is likely to fall dramatically in coming years.

"We expect these benefits to be passed on to the customer, which could help offset anticipated repricing for the Bank Levy."

The Australian Securities and Investments Commission review of the industry and the Sedgwick Review both found that loans originated by brokers were more likely to lower deposit and interest only, as brokers are paid on the size of the loan.

The ASIC review formed part of a coordinated effort by regulators to counter a rise in debt-fuelled speculation in the property market with broker incentives identified as a factor in encouraging riskier lending.

The credit rating agencies have also highlighted the rise of third-party originated home loans as flagging future risks in the housing market.

However, Finance Brokers Association of Australia’s executive director, Peter White, questioned the UBS report and said they were exaggerated.

White said the average broker commission on a mortgage was closer to $2500 to $3000 and that most brokers earned about $70,000 per annum of income.

"There seems to be grandeur on these numbers that don't make sense. This information is quite simply not correct practically and by examination of regulators' data."

UBS suggested that the robo-advice industry could easily replace brokers providing advice for a single commoditised product.

It said the rising trend of broker-originated loans was worth monitoring because loans not originated by the banks were more likely to be riskier or could contain irregularities in the application.

"We are not saying that all brokers will result in weaker underwriting but we think the compensation structure could encourage mortgage application fraud.

"We don't have hard evidence to suggest part of it is happening and suggests it could be a risk, but it does potentially increase the risk in mortgage portfolios."

While the mortgage broking industry has faced several reviews, they are still regarded as providing a useful service for borrowers keen to get the best terms from their banks, and can handle the administrative complexities.

UBS however "questioned the trade-off between the value received by the customer versus the cost of this service relative to other parts of the financial industry."

"While a mortgage is a large financial commitment, it is a simple, commoditised product."

There were only a few options available to borrowers while APRA's focus on sound lending practices "ensures there should be little difference in underwriting standards or size of loan offered across the banks."