Mortgage brokers add 16bps to every home loan: UBS

Mortgage brokers are earning $4600 for every home loan they write and are adding 16 basis points of costs to every borrower, according to research from investment bank UBS.

The sum total of commission paid by banks – almost $2.5 billion in 2015 – to mortgage brokers is about a quarter of the total cost of running their personal lending operations, analysts John Mott and Rachel Bentvelzen said.

As the banks face rising cost pressures and the pending $6.2 billion major bank levy 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.


The robo-advice, industry, UBS said, could easily replace brokers providing advice for a single commoditised product.

"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 executive director of the Finance Brokers Association of Australia, Peter White said he had some "serious questions" about the UBS findings which he said exaggerated how much mortgage brokers earned off a home loan.


"The vast majority are not in that arena. You get those swings but you can't generalise that as the industry norm."

Mr 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."

The research note comes as the industry is the subject of a series of reviews that have identified potential conflicts of interest in the way mortgage brokers are remunerated for their services.


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.

Fitch banking analyst Tim Roche noted that 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.


It was a trend 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."



Read more: http://www.afr.com/business/banking-and-finance/mortgage-brokers-add-16bps-to-every-home-loan-ubs-20170517-gw6n33#ixzz4p8Axo2Gh

 

Couple of points
I wish my average commission per loan was $4600

And if this is true “The sum total of commission paid by banks – almost $2.5 billion in 2015 – to mortgage brokers is about a quarter of the total cost of running their personal lending” that means the other ¾ of the total costs relate to paying bank staff. How much does this add to the average loan I wonder.

 

Ha! When the first sentence is so blatantly incorrect I really can't be bothered reading the rest.

At the end of the day, every person in every role on earth adds cost to the end product. How much value they add is another question entirely.

 

And bank overheads, branches and operating profit add 300 bps to every loan. Yawn move on.

 

Why should every bank loan holder bear the cost for few who uses brokers?
Like recent financial advisers reform, brokers should charge a fees from thier customer directly.

Its a layer of fat which sooner than later banks will have to address.

 

Why should every bank loan holder bear the cost for the majority that use bank staff to find their loans?

 

Don't bank charge loan fees?

Banks staff and branches are already on a decline, AI based chatbots and other technical innovations will make many staff redundant.
What makes you so confident that current MB business model is immune to technological disruptions?

 

Hmm UBS are on a rampage against the broking industry - series of articles, not just this one. This is well timed too, given theres a review in remuneration practices that is nearing its implementation stage.

In terms of the content of the article, as a distribution channel, yes i believe the broking channel costs > proprietary channels. Not sure exactly what % it would add to loans, but yes, that makes sense & words from major banks CEO's who've got the data on this seem to follow this. To date, it seems to be the preference from the Australian community (broker > proprietary channels now).

 

No they don't charge extra fees for using them instead of a broker

Who said I was confident? I suspect the average broker won't be needed much in the future.