A negative credit file doesn’t mean your client can’t get credit, but some options are better than others.
When your client applies for any type of finance with any kind of negative listing on their credit file, there are three options:
- They can obtain the finance they want if they wait until the negative listing has dropped off their credit file, which could take up to seven years. This option may appeal to clients whose negative listings are going to drop off their credit files in two months or less. In this instance, just waiting it out is not a bad idea.
- They can obtain finance, but only through a second-tier lender with higher upfront application and risk fees and ongoing higher interest charges. This option is good for those clients who have a property lined up and there is urgency to get finance sorted quickly, contingent on the client having the capability to service a high-interest loan.
- They can get their credit file cleared through a credit repair company, allowing them to go for the most affordable loan on the market. The credit repair option would work best for those who have negative information on their credit file that will stay there for three months to seven years; who have a bit of time up their sleeve to fix their credit score; and who would have a serviceability problem being approved for a high-interest loan. On average, credit repair can be concluded in six to eight weeks.
Out of all of these options, credit repair puts money back into the hands of your clients, while the other options will cost your clients, either through delays in entering the property market, continuing their reliance on the rental market, or via interest rate increases.
A Melbourne broker Princeville sat down with last month talked us through his scenario. He had just put his client with two defaults into a non-conforming loan with Pepper Money
. The rate was a 7.69% comparison rate on $400,000. This was costing the client $30,760 in interest per annum, or $2,563 per month.
During the conversation, we talked about how, if the client could clear their credit file using a credit repair service, they could be eligible for a 3.64% comparison rate loan, costing them $14,560 in interest per annum, or $1,213 per month. The difference in interest was a staggering $16,200 per annum, or $1,350 per month.
Clearing two defaults off a credit file can cost around $2,500, depending on which credit repair company your client uses. Based on the example above, a $2,500 investment would be recouped by the client in the first 55 days under a more affordable loan.
The broker talked to his client about how an extra $13,700 in his pocket each year, for the next few years, would take the pressure off, enabling the family to enjoy life a bit more, reinvest in their mortgage to reduce the amount owing, or spend extra on their kids.
When choosing to put a client into a high-interest loan, there is also the ethical element to consider if there are better solutions available. Clients are seeking out brokers rather than going Advocatesdirectly to lenders in more than 50% of cases, mainly to access a wider panel of lenders and get a better deal.
The ASIC Review of Mortgage Broker Remuneration
also reveals the potential conflicts of interest, pressure and incentives from aggregators and lenders that could lead brokers to put credit-impaired clients into high-interest loans. This cannot be good for the consumer, and the statistics on the prevalence of clawbacks by lenders confirms this.
"When choosing to put a client into a high-interest loan, there is also the ethical element to consider if there are better solutions available"
A typical clawback period runs for two years, and only between 4% and 10% of upfront commissions are clawed back by lenders. Clawbacks are therefore a highly effective tool used by lenders to ensure that refinancing to lower interest rates does not occur in over 90% of cases.
This is bad news for the credit-impaired consumer, who is placed into a high-interest loan for those two years, paying an extra $32,400 on an average mortgage. I don’t think the consumer thought they were shoring up broker commissions when they sought out advice about the best loan product.
There is an easy solution to this problem: only suggest a high-interest loan to a client who is aware of all the alternatives and still wants to proceed. Make the client aware that they can refinance at a much lower rate quickly by clearing errors from their credit report, after which they can apply for a low-interest loan. Ignore clawbacks and give the best advice. Aggregators, brokers and lenders will still receive their commissions on the new low-interest loan. It’s a win-win and a smart solution that puts the best long-term interests of the consumer front and centre when providing advice.
Dr Merrilyn Mansfield has been a consumer advocate at Princeville Credit Advocates since 2008. At Princeville, she heads the advocacy team and works on complex cases for consumers and companies who have negative, and potentially incorrect, information on their credit files. Mansfield is in her final year of law.
Consumer advocate at Princeville Credit Advocatesdirectly