07 May 2013 Do your sums to see if a no-commission home loan works for you

A mortgage broker has introduced no-commission home loans. This means you pay a flat upfront fee for them to find you the best loan and in return the broker forgoes all commissions and puts the money directly back into your home loan.

On a $350,000 mortgage, Independent Mortgage Planners, the broker, estimates these commissions to be around $14,000-plus over 25 years.

Using average rates, the impact of putting an extra $14,000 into repayments could see a further $50,000 in interest saved, IMP says.

That’s got to be good – so why am I not 100% convinced?

Well, for a start the upfront fee isn’t cheap – $3490 regardless of how much you borrow. Your loan also has to be a substantial size or repaid over a long period for the numbers to work.

The other issue is that not all home loans have inbuilt trailing commissions. Direct-to-market loans from, for example, UBank or State Custodians don’t pay trailing commissions.

The problem here is twofold. Go through IMP and you end up paying a costly upfront fee that’s not offset by the rebate. Go to a no-fee broker that relies on commissions and you won’t even be referred to these cheaper lenders.

There’s also the moral issue that if commissions are redirected back to the consumer rather than the broker, then aren’t banks effectively charging two different interest rates for the same loan? A cheap rate for loans through brokers and a dearer one if you go to them direct.

In general, most brokers don’t charge either an upfront or ongoing fee but are remunerated by the lender they refer you to. However, as Craig Morgan, IMP’s managing director, points out, when it comes to advice, “free” is not necessarily in your best interest.

While every lender has its own schedule of payments, most will pay a broker an upfront commission of around 0.6% of the loan amount. Trailing commissions of around 0.2% can commence at the start of the loan, or in some cases several years after you settle (a point to note if you go for a no-commission loan but intend to repay it in the first couple of years).

For brokers, there are big advantages in removing commissions from the mix. They avoid conflicts of interest, become truly independent and the range of potential lenders expands from just those on their panel to every home loan in the market.

Morgan gets around the issue of consumers not getting rebates on cheaper direct-to-market loans by offering a guarantee.

“If I can improve their situation in accordance with their time frames, goals and objectives and after allowing for our fee, then they pay us and we both win. If they are better off, say, with a UBank-style loan, then I would simply say that this model is not for them and for them to go directly to that bank.”

Morgan also makes the point that there would be plenty of cases where a higher-rate loan with rebates is actually cheaper in total that a lower-rate loan with no rebates.

While I find it an awful lot of money to pay upfront, there’s merit in doing some sums, because depending on your loan size and term this could just work for you.

Let’s say, for example, you take out a $350,000 loan. Assuming you use the standard variable home loan rate, less a packaged discount of 0.7% over 25 years, you would pay about $300,000 in interest and fees if you went through a traditional broker. Use a no-commission loan broker such as IMP and you’d save $17,000-plus in interest and fees. (This even assumes you capitalise the fee into the home loan.)

So what’s the wash-up here?

I have no problems paying an upfront fee in return for good service and independent advice, but with so many broker models you can see why consumers get confused.

I say get rid of trailing commissions altogether. Pass on the savings directly in the form of lower home loan rates across the board and keep upfront brokerage costs fair so that the average Aussie can get the professional service and advice that they deserve. We don’t want a repeat of rogue brokers who in the eighties and nineties charged a fortune promising debt-reduction mortgages that were no different from what could be set up for free.

The big question is: if trailing commissions were abandoned, would the banks actually pass on the savings? Probably not, which brings us back to square one. Do your research on brokers as clearly there are many models to choose from.

Reproduced in full with permission: ninemsn.com.au Money Do your sums to see if a no-commission home loan works for you 5 April 2013

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