Ethics of Mortgage Broking

Mortgage brokers don't lend money; they match borrowers to loans from banks and other lenders. Brokers can provide convenience to clients, with a ‘one stop shop’ offering information and access to a huge range of loan products. However, many mortgage brokers claim they’re ‘independent’. By their very nature, brokers can never be independent because, unlike share brokers, they are paid by lenders not borrowers and they only provide access to part of the market (albeit a very large part). Describing oneself as ‘independent’ whist taking commissions is now illegal for financial advisors.

Banks and other lenders regard mortgage brokers as distributors or resellers of their product in exactly the same way that Target is a distributor of home appliances or Dymocks distributes books. Broking is sales and there’s nothing wrong with that – so long as borrowers are aware of the fact.

Yet there’s no doubting the sales power of claiming to be an independent advisor. One mortgage broking chain stresses the ‘independence’ of its product selection software to borrowers, but holds out this and other software to its own brokers as ‘sales’ technology.

Regulation is intensifying for brokers, but it is simply imposing ever-increasing compliance hurdles on brokers to improve their ‘advice’. This merely legitimates brokers’ claims to be advisors while adding costs. Instead we should require brokers to describe themselves to clients as they do within the industry – as salespeople.

What does this mean for you as a borrower?

You should:

• Keep an eye on the market for products not offered by brokers.
• Check that the product from the broker is as good as that offered by the lender. (One major lender has higher exit penalties for broker-originated loans than for those written directly.)
• Use a broker like a salesperson in a department store – they’ll be a very good source of information, but take their ‘advice’ with a grain of salt. It may be motivated to get a “sale”. This is especially true of advice to ‘refinance’ which is often motivated by the higher commissions brokers get from refinancing the whole of your loan, not just extending your existing borrowing.
• Shop around and ask several brokers for suggestions. But brokers are people too. Clients should ‘interview’ brokers over the phone, ask them for product suggestions and then select their first choice to make a home visit if one is required.
• Remember that, like discount department stores with the same product at a lower price, discounting has now commenced in mortgage broking enabling savvy borrowers to access most of the market at closer to ‘wholesale’ prices – that is with cash back to borrowers.

*By Nicholas Gruen, CEO of Peach Discount Mortgage Broking.