Mortgage brokers reap $2b annually in commissions

Sunday Herald Sun, News.com.au, 26 August 2007

ANTHONY BLACK, Your Money editor

MORTGAGE brokers are earning almost $2 billion in commissions a year at the expenses of borrowers, finance experts claim.

Hamish Carlisle, of mortgage provider QuickDirect, said an average commission for a mortgage broker writing a $250,000 loan over 25 years was $2350 in the first year and $12,672 over the entire term.

He said lenders paid brokers up-front commissions averaging 0.67 per cent of the value of the loans and trailing commissions of 0.27 per cent a year.

Denis Orrock, of financial services provider Infochoice, said borrowers were indirectly paying mortgage broking commissions of about $1.8 billion each year.

"Brokers get around the issue of commissions by telling customers these expenses are covered by the bank or loan provider," Mr Orrock said.

"While technically true, in reality these costs are factored into loan pricing and ultimately the customer pays through higher interest rates and fees.

"With housing affordability at an all-time low, this is a cost most Australians can ill-afford."

Phil Naylor, of the Mortgage and Finance Association of Australia, said borrowers did not pay higher interest rates, fees or charges for using mortgage brokers. Lenders, whether banks or non-banks, paid the brokers' commissions, not the borrowers.

He said mortgage brokers offered a valuable service by providing a wider choice of loans to borrowers at no cost.

Roger Mendelson, chief executive of debt company Prushka, said borrowers had to be more vigilant than at any stage when choosing a home loan product.

Mr Mendelson said that while low-documentation and sub-prime loans served a purpose, they could lead to financial suicide for the unwary.

Low-documentation loans attracted the self-employed who did not have to prove a steady income, while those with poor credit histories were drawn to sub-prime products.

Mr Mendelson said higher interest rates, fees and charges were generally attached to "low-doc" and sub-prime loans because the borrower was considered greater risk.

He said borrowing 100 per cent or more of the value of the property was a recipe for disaster that could leave new homeowners in negative equity positions.

Over-stretched borrowers without equity had zero bargaining power if something went wrong, such as job loss.

*Assumes interest rate of 8 per cent, current QuickDirect variable interest rate is 7.64 per cent.

**Assumes interest premium of 3 per cent of loan value.