Broker commissions pushing rates up: UBS

by Miklos Bolza28 Jul 2017
The rising costs of broker commissions are pushing mortgage rates up by 16 basis points per year for every Australian’s mortgage, according to a top banking analyst.

Jonathan Mott from UBS said that a “blow-out” in commissions, which exceeded $2.4bn in 2015 (increasing 18% from $1.46bn in 2012), was linked to higher rates for mortgage holders across the country.

“Although commissions are deducted from NIM (not expensed) this is equivalent to 23% of the cost of running the major banks’ entire personal and consumer banking operations,” he said in an Australian banking sector update entitled ‘Are Mortgage Brokers Overpaid?

“Average commissions are now $4,600 per mortgage, which we believe is disproportionate for advice provided on a simple, commoditised, single product, particularly when compared to the fees charged by financial advisors for ‘simple’ financial advice ($200 to $700).”
  2012 2015
Upfront commissions ($m) 729 1,420
Trail commissions ($m) 733 984
Total commissions ($m) 1,462 2,404
Compound annual growth   18.0%
No. of broker mortgages written 340,000 520,000
Total commissions per mortgage ($m) 4,300 4,623
Total mortgages outstanding ($bn) 1,270 1,525
Total cost of broker commissions per mortgage (basis points) 12 16
Source: ASIC, company data, UBS estimates

The above figure for total commissions per mortgage was likely to be understated, Mott added, since it took the total commission revenue divided by the mortgages written in that year. This failed to take into account that trail commissions were earned from mortgages earned in prior years over a smaller number base, which means the average commission earned over the life of a loan is likely to be even higher.

“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. At the end of the day, these costs are born by all mortgage customers.”

Mott acknowledged that many customers valued the services of a mortgage broker but questioned the trade-off between the value received versus the cost of service.

“While a mortgage is a large financial commitment, it is a simple, commoditised product. Options are relatively limited (fixed vs variable, interest only vs principal & interest, offset account) 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.”

He said he expected the banks to negotiate “materially lower fee-for-service mortgage commissions” in the near future to comply with both the ASIC and Sedgwick reviews. He recognised that brokers would likely be unhappy with this outcome but said there was little they could do.

“If mortgage brokers refuse to deal with one or more of the banks on the basis that its commission rates are too low, this will reinforce the inherent conflict of interest highlighted by ASIC (lender choice conflict).

“Additionally, if the mortgage broking industry chooses to channel more flow away from one or more major bank, the other banks would not have capacity to absorb this flow without breaching their APRA caps (investment property loan growth must be comfortably below 10%).”

Mott also said that advice for a commoditised, single product such as a mortgage could be easily provided by robo-advice.

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