The Reserve Bank of Australia has warned banks over increasing broker commissions, saying it could create “significant amounts” of risky lending.
In its Financial Stability Review released yesterday, the central bank says competition in the residential mortgage market has remained vigorous over the past six months, causing lenders to compete more vigorously for new business – such as increasing commission rates or other incentives paid to brokers to help gain market share.
However, the Reserve Bank has warned lenders that increasing broker market share through commission incentives may breed risky lending practices.
“… [I]ndustry estimates indicate that 40–50 per cent of new housing loans are now sold through mortgage brokers,” the report stated.
“The more banks use brokers, the greater is the risk that a misaligned broker incentive structure would generate significant amounts of lending that is outside their risk tolerance or is otherwise inappropriate.”
The Reserve Bank also targeted significant rate discounts and interest rate ‘specials’.
“Lenders are competing for new borrowers by offering attractive fixed rates and significantly discounting their advertised variable rates; discounts of 100 basis points or more are now widely available,” the report noted.
“Short-term interest rate ‘specials’ targeted at specific borrower segments, such as borrowers refinancing with low LVRs, have become more prevalent.”