You had to be hiding under a rock if you didn’t realise the final report from the Royal Commission into the misconduct of the Banking, Superannuation and Financial Service Industry was released on Tuesday (February 5th). There has been a strong response from many individuals and companies with experts in the property and finance industry handing down their judgements and concerns.
The final report is 530 pages long and provides 76 recommendations on how to restore trust in our financial services and delivering customer first outcomes whilst still maintaining the flow of credit and competition.
The recommendations are broken over 7 subject matter including banking, financial advice, superannuation, insurance, regulators and culture and governance remuneration.
No stronger reaction has come from an affected party more than the mortgage broking industry. The recommendation that trailing commissions on new loans be banned from July 2020, has caused uproar.
So does this report affect the property market, directly and indirectly, yes! The recommendations around banking and financial advice, including the ability to easily source not only competitive loans but appropriate loans for a borrower’s circumstance, will have a flow-on effect onto people’s ability to buy property.
We take a look at the recommendations under Banking and Financial Advice that impact the property market the greatest.
We have all heard the much-touted story of a solid borrower being knocked back due to spending $50 on Uber Eats of a Friday night. So, the first good news is there will not be a further tightening of lending. The last 3 years have seen stricter and some say over the top credit restrictions in response to irresponsible mortgage lending practices. Traditionally, banks or lenders have used the Household Expenditure Measure (HEM), a benchmark for customer expenses, to assess people’s ability to repay mortgages. In response to APRA’s concerns over the validity of this benchmark, banks started to verify borrower’s expenses more accurately and with more detailed categories.
But what did this mean for the property market? At one point buyers were flooding the market as loans were easy to secure and at higher amounts. More buyers, more competition so prices headed north. Then in response to APRA’s recommendations for responsible lending and the introduction of the 30% cap on new interest-only loans (which has now been lifted) we saw a significant drop in investors in the market and a drop in the amounts being loaned. Less buyers, less competition, prices stabilise or drop.
Lenders and borrowers are adapting to these more stringent requirements and it will slowly become the norm. But our best advice is that loan pre-approvals are now taking longer to secure if you are thinking of buying start the process early. You do not want to miss out on your dream property because the loan pre-approval process has been delayed.
One of the recommendations that has caused the strongest reaction is that by July 2020 trailing commissions for mortgage brokers will be banned and that an upfront fee for service model is implemented paid by the borrower. This recommendation has far-reaching impacts as there are approximately 20,000 mortgage broking companies in Australia.
We know as Buyer’s Agent that operating under a fee for service model it can be difficult to assure people of the value proposition of our services. But this model guarantees our independence and ensures that our client’s best interest are our only concern. We also know from the large number of repeat customers or referred customers that once people have used our services that the value proposition is clear and worth the upfront costs.
Currently, mortgage brokers provide an important free service to borrowers which is proven by the fact that 6 out of 10 clients choose to use the broker channel instead of bank branches. It can be difficult for borrowers to find the best loan product for their circumstances amongst the plethora of options out there.
So what does this mean for the property market? There has been speculation that mortgage brokers will become a service for the wealthy as first home buyers or low-income earners will baulk at paying an upfront fee for something they perceive they can do themselves. There has also been speculation that smaller lenders will find it difficult to compete with the big four banks as they will not have the broker distribution network. If there is less competition from lenders this could drive interest rates up. If interest rates increase so do bank assessment rates and it becomes more difficult to secure loans (especially for nonstandard borrowers eg. small business owners, freelances) so there will be less buyers in the market. And less buyers mean less competition driving property prices lower.
However, if all mortgage brokers, not just the reputable ones, are truly working for the best interest of their client then they should be securing highly competitive loans for them. The impacts this could have on the mortgage industry are significant and perhaps for another blog but we are already hearing rumours of mortgage brokers that are planning to retire early instead of having the value of their business stripped away.
The current Coalition Government response to the Royal Commission is that they are taking action on all 76 recommendations contained within the final report. In the government’s response, they have stated: “The Government recognises the importance of competition in the home lending sector and will proceed carefully and in stages, consistent with the recommendation, with reforms to ensure that the changes do not adversely impact consumers’ access to lenders and competition in the home lending market.” But with a Federal Election coming up soon it is difficult to know which political party will have the final say and how far these ‘actions’ will go in embracing the recommendations.
The Royal Commission findings and recommendation go a long way in ensuring the customer’s interests are always first, and removing conflicted remuneration practices. (eg larger commissions for referring particular products or individual bonuses based on sales volumes not customer needs).
As with all these things, initial responses are strong and fevered and will die down over time. The property market will continue to cycle between growth and decline phases and the next six months with elections looming will be more important than ever. And buyers should continue to arm themselves as much as possible with knowledge from independent advisors to ensure they build their wealth based on informed decisions.