Mortgage Broker "Best Interest Duty"

If you read our blog from November 2019 we wrote about ASIC Regulatory Guide 273 “Broker Best Interest Duty” we thought that it was time for an update.

So, what is a broker’s best interest duty (or obligation).  In simple terms it means that a broker has to place their client’s interest first and foremost, without any consideration of themselves.

To be fair, this legislation was not required for 99.9% of the broker industry; most brokers looked after their clients as best as they could, providing great service, products and rates.  But for the 0.01% that weren’t doing the right thing, well we, and most other brokers, welcome them being pushed out of the industry anyway.

Across the board most prime lenders pay an almost identical rate of commission, so this should never be a consideration.  But there are other things that do come into consideration, such as:

• How long will the lender take to give an approval?
• Are the borrowers eligible for the lenders loan offer?
• What is the interest rate and other fees?
• Features and Benefits?

And while RG273 says that price should be the preeminent consideration, quite often there needs to be a discussion about these other issues – for example if you have signed a purchase contract with a 7 day cooling off period, is it relevant to send your application to a lender that has the best rate; but also a 10 day turnaround? No, in that circumstance the second or third best offer may be the way to go.

This, to us, is also acting in the clients ‘best interest’, we need to meet a timeframe, and meeting that is the most important consideration.

Here are a few more of our thoughts:

Time for an approval

If you are under a tight timeframe to get an approval and settle is it in your best interest to send your application to a lender that is 0.1% cheaper, but will take 2 weeks to get an approval? No, certainly not. But suggesting a more expensive lender that can give you a decision in 24 or 48 hours makes sense; that’s in your best interest.

Eligibility

On our lending panel we have a lender with great rates. But if you want to borrow more than 80% of the value of the property you need to pay Lenders Mortgage Insurance, which depending on your circumstances can be expensive.  Lots of younger applicants obtain a guarantee from their parents to avoid this insurance cost – this lender does not offer loans with guarantors. Again, using a lender with a higher rate that does permit the guarantee and save the insurance may be in your best interest.

Interest rates and fees

Lots of lenders offer loan packages where you pay an annual fee in exchange for ‘fee free banking’ and a discount on the interest rate, but does this offer value for money? If for example your loan is small the interest saving may well be less than the annual fee. There are lots of financial institutions that offer free basic accounts so that’s not a real consideration. In this case is the advertised lower rate with an annual fee in your best interest?

Features and benefits

Taking a basic loan that has limited features is usually cheaper than the loan with all the bells and whistles. A basic loan may not offer an offset facility but will still allow you to redraw any additional payments that you have made. This means that you need to ‘park’ your spare cash in your loan account and redraw it if you need the funds – same horse, different jockey? This is true with an owner occupied home loan, but an investment loan? If you pay money off the loan and then redraw it for personal purposes it may affect your tax deduction on the loan (disclaimer here, we’re not accountants or tax advisers, this is a generalisation and you need to get your own professional advice). For an investor we may suggest a loan with a higher rate, but with the features that you need.

Summary

Getting a home loan is a little more complex than buying milk at the corner store. Get the milk wrong and you endure it for 3 days or so. Get the loan wrong and you may be enduring it for 30 years or so.

An experienced mortgage broker will guide you through all these points and much, much more.  Challenge them and ask them why they are making the suggestions that they are – if their answer sounds fishy, or they can’t answer effectively then there may something wrong.  If their reasoning is rational and makes sense, then guess what? The broker is probably acting in your best interest.

We didn’t really need legislation about this (but we have it anyway). But it does give you a lot of confidence and security in dealing with a broker. Feel free to give us a call to discuss, we only have your best interest at heart.

Remember as well, it is only brokers that have this legislation to protect your interests, not the local bank (because they only sell their own products, brokers sell lots of different products).