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Experts Predict Further Housing Downturn Due to Home Loan Rate Hikes

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According to CoreLogic’ analyst Cameron Kusher, the latest rash of out-of-cycle interest rate hikes being imposed on owner-occupier homes loans could further reduce the demand for property and bring down the value of property prices.

His comments came after interest rate hikes on owner-occupier home loans by 15-16 basis points were announced by Commonwealth Bank CBA and ANZ. Mr. Kusher says it will not only affect residential owners, but also investors. Additionally, these issues are apt to drive large-scale regulations and tougher credit restrictions.

Westpac also increased their rates by 14 basis points due to what they call a “sustained rise in wholesale funding costs.”

It seems these major banks gave in to funding pressures after several months of altered pricing from smaller lenders, with NAB the only one of the big four banks to forgo the same rate hikes.

Mr. Kusher commented, “From a housing market perspective, the timing of the announcement of higher interest rates is an interesting one.  After many years of strong value growth, Sydney and Melbourne housing is now well embedded in a downturn.”

He continued, “Tighter credit conditions, higher mortgage rates for investors and interest-only borrowers and reduced affordability have already led to the falls of 5.6 per cent from the peak in Sydney and 3.5 per cent from their peak Melbourne. This has occurred so far without higher interest rates or owner-occupiers paying off principal and interest; however, that is about to change.”

The timing seems to be interesting, according to Cameron, since it comes at the same time of the “spring selling season”. Usually lenders reduce their rates in the spring to boost borrower interest, but the rise in expenses have left them no other choice but to increase their interest rates as well.

The higher mortgage rates have been slowly driving away investors over the past year. Though the significant mortgage rate interest increases that have been announced are relatively small, the likelihood that higher mortgage rates will affect the housing market sentiment.

The decline of the housing markets of Melbourne, Sydney, Perth, and Darwin may be amplified.

“Overall this move seems likely to lead to a continuation of the currently weak housing market conditions over the coming months and may weaken the market further,” said Cameron Kusher.

Lenders are doing what they can to maintain profitability in the face of the lower mortgage volumes.

Are Major Banks Creating an Anti-Competitive Behavior Environment?

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The mortgage lending industry is being challenged by the majors in various ways. They started by making accusations against mortgage brokers, changing the rules, and now by creating an environment of anti-competitive behavior.

The mortgage industry has responded with their own comments and accusations toward the majors regarding the recent interest rate hikes that are out of cycle. They have even accused one major bank of bait-and-switch tactics.

Westpac, Commonwealth Bank CBA and ANZ lifted their variable owner-occupier loan rates by 14, 15, and 16 points, which resulted in being critiqued for that change.

The ANZ was accused of bait-and-switch tactics by HashChing COO Siobhan Hayden after they increased their rates only five weeks after claiming they would be making reductions in home loan rates. She said she is “surprised” at this action due to the current culture of “scrutiny from the Royal Commission into Misconduct in the Banking Superannuation and Financial Services Industry,” according to The Adviser.

Ms. Hayden commented, “It’s surprising that three of the major banks have increased interest rates in unison, despite being hauled over the coals in the recent banking royal commission. ANZ’s rate increase is particularly shocking, given it only just announced a rate reduction five weeks ago.”

She continued with, “During a period of clear upward pressure on wholesale funding costs, ANZ announced a 34-basis point reduction in owner-occupied lending for new customers only. Now, just over a month later, it has announced a 16-basis point increase to both residential and investor lending from 27 September. This seems like a classic bait-and-switch. Customer encouraged by ANZ’s rate reduction announcement on the 1st of August would rightfully now feel betrayed and manipulated by a ‘honeymoon rate’ seduction.”

The ANZ answered the accusation by saying they were only offering that rate reduction to new home loan customers and those discounted rates are still in place for eligible borrowers.

Ms. Hayden further accused that ANZ and other major banks of promoting “anti-competitive behavior” with such increases on borrowers.

COO added that the Commonwealth Bank reported an annual profit of $9.38 billion while “Australians are at risk of losing their homes” to higher repayment. These are the same people who cannot get bank approved for refinancing their home loans. “It’s an absolute shambles, and someone needs to take responsibility, “claimed Ms. Hayden.

She finished off by saying, “With NAB likely to follow suit, and smaller lenders such as Suncorp and Adelaide Bank already hiking up rates, too, there’s real concern that Westpac’s increase has trigged a landslide across the whole market. The anti-competitive behaviour of the big four is certainly something Scott Morrison should look into. It’s un-Australian.”

Sally Tindall chimed in with, “What this rate hike means is that the vast majority of variable rate home owners will now be shelling out more on their mortgage each month.” It’s not as if those payments aren’t already high enough.

Ms. Tindal also said, “NAB would do well to break free of tradition and find a different way to wear the additional expense.”

According to analyst Cameron Kusher from CoreLogic, these “out-of-cycle rate increases on owner-occupier mortgages” might put more pressure on the housing market, creating a decline in demand from property investors prompted by a large-scale closefisted regulation and stricter credit conditions.

Kusher said, “From a housing market perspective, the timing of the announcement of higher interest rates is an interesting one. After many years of strong value growth, Sydney and Melbourne housing is now well embedded in a downturn.”

Cameron commented, “Tighter credit conditions, higher mortgage rates for investors and interest-only borrowers and reduced affordability have already led to the falls of 5.6 per cent from the peak in Sydney and 3.5 per cent from their peak in Melbourne. This has occurred so far without higher interest rates for owner-occupiers paying off principal and interest; however, that is about the change.”

He also said the timing of these rate increases happened to be during the beginning of the “spring selling season”. Typically, lenders reduce their rates in the spring to encourage borrowers, but the rise in expenses leaves them no other option but to increase their rates.

The CoreLogic analyst claimed, “Higher mortgage rates have already driven a slowing of demand for investors over the past year. Although the magnitude of the mortgage rate increases announced is fairly small, it is likely that the higher mortgage rates will impact on housing market sentiment. It may end up further exacerbating the declines which are already occurring in Sydney, Melbourne, Perth, and Darwin and the slowing of value growth being experienced elsewhere.”

In conclusion, Mr. Kusher said that “Overall, this move seems likely to lead to a continuation of the currently weak housing market conditions over the coming months and may weaken the market further. From the lenders’ perspective, clearly they realise that the housing downturn is becoming entrenched and they are doing what they can to maintain profitability in the face of lower mortgage volumes.”

Mr. L Davison – Nowra NSW

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Hi Tony

I just wanted to thank you for all your help with my refinance.
If ever asked by anyone I will recommend you and your team in a ‘heartbeat’.
The ladies that assisted me throughout the process were amazing and could not find high enough praise for the highly professional support and reassurance they gave me, even when being slightly difficult, they remained supportive and available.
Thank you Tony and I look forward to conducting business with you and your amazing team again at some time in the future.
Take care, kind regards

Mr. L Davison.
Nowra NSW

How Brokers Make the Mortgage Markets Better

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A new report published by DAE (Deloitte Access Economics) mortgage brokers makes the mortgage markets work better. They expand choices and boost competition between market lenders, which pushes them to provide superior customer service and more competitive mortgage pricing.

DEA’s report is The Value of Mortgage Broking and it was published 24 July 2018. It outlines the evolution, expansion, and the role mortgage brokers play in Australian mortgage lending. It also discusses the impact broking has on Australia’s economy, lender value proposition, and customer value proposition.

The report was released in the face of the increased scrutiny of the broker sector (the ordeal of broker remuneration), the focus of the PC’s (Productivity Commission) review of the Australian financial system competition and the financial services royal commission.

The aim of the DAE report is to provide the most “up-to-date body of information” about the mortgage industry to broaden the information about the role of mortgage brokers in the market for policymakers. It explains how important brokers are to the economy, the consumer, and to small lenders.

The DAE report is 47-pages and it took six months of research and data gathering to complete. It is broken up into four parts.

  • The dimensions and the history of the brokering industry
  • The value mortgage brokering brings to the economy
  • The benefits and outcomes for consumers
  • The value potential of brokers for lenders

Bringing data forward from a vast range of sources such as the ASIC, MFAA (Mortgage & Finance Association of Australia), the ABS, and articles from The Advisor, their report uncovers new data they collected from a nationally represented survey of 1,635 brokers (independent and those who work in a group setting), consults with industry professionals and participants, and a focus group workshop that included mortgage brokers.

The Key Findings

The DAE Survey said:

  • On average, sole trader mortgage brokers earn an income of $86,417.
  • Broker businesses with more than one broker reported earning an average of $119,838.
  • 73 per cent of working mortgage brokers work full-time.
  • 90 per cent of sole traders work full-time.
  • 23 per cent of brokers’ customers are first-time home buyers.
  • Over half (57.3 per cent) of brokers’ clients are residential owner-occupiers.
  • The average mortgage broker has 13.8 years of experience.
  • 70 per cent of the broker’s business is from their existing client base.
  • The brokering industry sustained 27,144 full-time jobs in 2016-2017.
  • There are around 7,115 people working in supporting roles in the brokering business.
  • 70 per cent of mortgage brokers are credit representatives.
  • 64 per cent of mortgage brokers have training and education above the minimum entry qualifications – Certificate IV in Finance & Mortgage Brokering.
  • The brokering industry supplies $2.9 billion to Australia’s economy every year.

More discoveries included the confirmation that lodging loan applications and the management of said process all the way to the settlement require the most time from brokers (only 12 per cent of their time is spent after the settlement). Additionally, the average mortgage broker has access to a network of 34 different lenders and uses around 10 of them on average.

The DAE report confirmed that “mortgage brokers sell more loans than lenders’ own distribution channels (e.g. through branches, mobile lenders, and over the telephone)”, using the statistics from the MFAA that showed that the mortgage brokers’ share of new residential loan settlements attained 55.7 per cent by value during the September 2017 quarter.

More insights from the report included how mortgage brokers encourage competitive pricing and boost consumer’s options and services. It reads, “Overall, mortgage brokers make mortgage markets work better. They are intermediaries that provide consumers with information about the mortgage products available and the process to follow in applying for a mortgage.”

It continues, “Mortgage brokers also provide lenders with an additional channel to arrange loans. Mortgage brokers increase choice and competition between lenders, leading to better service levels and competitive mortgage pricing.”

“Mortgage brokering is also an industry in its own right, providing direct employment opportunities and supporting employment in other industries… A continually improving mortgage brokering sector will be good for consumers, lenders and the economy. Along with changing technology, consumer preferences and broader finance industry changes, regulation and self-regulation/co-regulation will shape the future of an industry that has evolved considerably over a number of decades since its emergence in Australia.”

Feeding the Public Debate with Fact-Based Data

Mike Thomas, the Deloitte Access Economics Director, spoke with The Adviser and said, “This has been a very large information gathering exercise that has taken well over six months. Putting a survey out into the field, getting the data back, processing all the data…going through the written report, updating the data as new data came to hand and the getting it to the final stage really (meant it) was an extensive body of work.”

Mr Thomas said DAE was asked to put together a fact-based report for the public and for policymakers with the onset of all the scrutiny the industry has faced over the past several months/years. It needed to have evidence and be carried out in an informed way to ensure accuracy.

It’s important that policymakers and regulators have a sound evidence base from which to work before making changes that could turn not only an industry, but the Australian economy on its ear.

According to Mike Felton, the CEO of the Mortgage & Finance Association of Australia, this report shows the many positive influences brokers have in the industry and the vulnerability of brokers who make only $86,400 per year. This way, they can ascertain how making alterations to the brokering industry could adversely affect that income. Therefore, the report went above and beyond its original intentions.

Peter White, executive director of the FBAA (Finance Brokers Association of Australia), says that customer satisfaction drives the brokering industry and that their referral and return style business pushes brokers to know and understand everything about their customers in order to help them find their ideal mortgage. Over 90 per cent of home buyers say they are happy with the performance of their broker.

Mortgage brokers are dedicated and experienced professionals who strive to create a quality experience for their clients. That is partly driven by the fact that this is a referral and return style industry.

Mr White is hopeful that the report will create a clearer and more concise understanding of the industry and how it works. That was the goal of having an independent, highly reputable entity perform the research and reporting.

He continued by stating that this report isn’t of the industry’s self-interest, but instead is a solid report that can be confidently cited due to the quality of the research and the neutrality of Deloitte.

The survey and report show a vast difference in how the general public sees the industry as a helpful and effective channel for obtaining a mortgage, which defies how the media scrutinizes and criticizes it.

The MFAA plans to launch a huge marketing campaign across Australia intended to promote the value of brokers to the public, while working towards debunking misreporting and myths related to brokering within the mainstream media channels.

First Choice Mortgage Brokers are a Sydney Mortgage Broker operating under the Australian Credit Licence Number: 382370

Branches Vs Brokers – How Brokers Create a Competitive Edge

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The bottom line is that if there were no mortgage brokers, there would be no way to challenge the banking sector and smaller lenders would have little chance to succeed in the market.

The DAE (Deloitte Access Economics) released their The Value of Mortgage Brokering report in July, which accentuated the affect that brokers have on competition in the lending industry and how it is valuable to lenders, consumers, and the economy.

According to the DAE report, brokers allocated 28 per cent of their loan deals to smaller lenders over the big four banks and their known affiliates. The reported also included the information that brokers completed 55.7 per cent of the mortgages during the September quarter. If you consider loans lodged with banks besides the big four, not including affiliates, the figures come out to 49.3 per cent of mortgage loans were sent to these lending institutions.

Deloitte referred to the Productivity Commission’s (PC) draft report into competition in the Australian financial system, outlining that brokers have enhanced the market share for small lenders by 1.55 per cent and that banks would need to establish 118 new branches to create an equivalent in that market share.

This discovery of the DAE report comes at a convenient time given that Bankwest recently decided to close 29 of its branches. Rowen Muchenberg, Bankwest’s managing director, they knew they couldn’t compete with the major banks.

Bankwest has decided to focus on digital channels and broker relationships. Munchenberg said, “Many people still value face-to-face interactions, but customers increasingly expect seamless self-service options that allow them to do their banking when and where they choose.”

According to Mr Munchenberg, there is been an uptake of 88 per cent in consumers preferring banking and financial app transactions over face-to-face in-branch solutions in just the past three years. This factor plays a key role in their decision to adopt such technologies and steer clear of building more branches. This will allow them to compete in this climate.

Broker Avenue Vs Branch Avenue Costs

In light of this topic, let’s discuss how much it costs to open and operate a branch.

The PC (Productivity Commission) draft mentions seeking out evidence related to the comparative costs of doling out home loans via the broker channel versus the propriety channel (banks). However, they could not gather enough evidence from third-party channels and lenders while they were compiling the report.

The PC did comment, “Whether brokers are an efficient, lower-cost distribution channel for lenders depends in large part on the way lender branch costs are apportioned between different activities. That the providers of half of Australia’s home loans were unable to give evidence on how they assess the costs and benefits of using brokers rather than branches to source home loans is surprising.”

Peter White, the executive director of the FBAA (Finance Brokers Association of Australia), chimed in and proposed that the cost of using a broker is about half of the cost of using proprietary channels. He said, “The use of brokers evolved from a clear recognition that the value of using a broker was more attractive than branches and staff.”

Mr White feels the propagation of brokers has happened due to the benefits of the ever-expanding broker network that product issuers know is a cheaper and more effective distribution model than branches that require staff. That’s why the broker channel continues to flourish.

The DAE’s report states that while “transaction costs are higher in the broker channel due to commission payments” and that “processing costs are similar for both brokering and banks direct channels”, lenders can make “significant savings” via the third-party option.

The report also stated that the costs of mortgage distribution through branches encourages higher infrastructure expenses and overhead, which may make up 40 to 60 per cent of their operating expenses.

Some costs included with branches are property leases and rentals, marketing and advertising costs, computer equipment, electricity, computer software, staffing, and training and compliance expenses. The third-party channel consumes most of the financial responsibility, according to the DAE’s report about compliance costs.

Costs related to training and staff compliance can become substantial on a per loan criterion. “Aggregators train and mentor their mortgage brokers and enforce compliance”, according to the report.

Brokers’ Wider Distribution Approach

The Deloitte report stated that mortgage brokers offer lenders with a “distribution channel that complements existing branch networks or stands in for them where none exist.” Three ways this happens includes the following.

Lender Segments – Since brokers are the primary distribution network for small lenders (including non-ADIs and banks), these lenders are able to do business with more clients beyond the big four banks. Otherwise, they would incur the expenses related to opening new branches to distribute their products outside of the local market or withdraw from the market.

Broader Consumer Reach – The geographic reach of brokers expands the market more efficiently than direct lenders.

Market Sensing – Where lenders have a physical presence, they have brokers from which to get feedback for making future decisions related to what produces and services they will offer. According to the DAE report, these non-bank lenders value the feedback they get from brokers and consider then a reliable resource regarding which customers need their help and what solutions they can offer them.

In the summary of the Deloitte report, they included comments from Michael Trencher, the head of broker distribution at Heritage Bank.

Mr Trencher stated, “The key benefits of the mortgage broker channel (to lenders) are scale, distribution, broadening service and providing access to other areas of key banking services.”

With this new information from the DAE report, you could say any pursuit to sabotage the existing broker channel would create a net loss for every stakeholder. However, the evidence clearly reflects that the average loan client would suffer the biggest loss.

Limited choices in home lending and mortgages would adversely affect consumers who are struggling to decipher the complicated world of the mortgage industry. With more choices, they avoid higher operating costs, higher pricing and fees, and more lenders that can help more consumers.

First Choice Mortgage Brokers are a Sydney Mortgage Broker operating under the Australian Credit Licence Number: 382370

Overly Strict and Impractical Credit Decisions May Exploit Borrowers

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Xavier Quenon, Go Mortgage director, issued a warning to mortgage borrowers regarding the stricter and vastly impractical new bank credit practices and how they are likely to harmful to borrowers in the coming three years.

Many consumers may be worse off as a result of the impractical and unreasonable changes in bank lending, according to Quenon. He said, “A deal used to be hooked on servicing and valuation. Those were the two pillars, which are still there, but servicing has become more complex because of living expenses. There are compulsory expenses and discretionary expenses and all the banks have a different point of view.”

He claims there are more “mortgage prisoners” due to these new changes in banking mortgage lending.

Quenon, a Queensland-based mortgage broker, attended a FAST PD Day where he engaged with a discussion about the future of brokering. He said they spoke about the industry and where it will be in 2020. The discussion revolved around brokers, lenders and the kind of advice they should now provide to their clients. “The Productivity Commission, Sedgewick, and the ASIC remuneration review, while no longer topical, are the changes that are coming. The royal commission will deliver its results in 2019,” according to Mr. Quenon.

In his interview with The Adviser, he stated, “Between this year and 2020, we need to implement what is or was decided from the Productivity Commission and Sedgewick report. What will the industry look like once that has been implemented?”

Brokers who attended the FAST PD Day were presented a case study where applicants who wanted to have a renovation done, applicants who were planning on having children, and those who were business owns. According to Quenon, the takeaway was that brokers need to look at how each loan will service applicants with one income, two incomes, or those with or without children.

It is unreasonable to expect brokers to predict or guess about one or two incomes or how many children clients will have, but this is where the new guidelines are going. It seems that this will be the new norm.

Due to government policies, these guidelines and rules are simply impractical. The very people, consumers, who should be protected, will be victimized.

As banks stiffen lending policies in an over reaction to regulatory pressure and constant scrutiny, significant shifts will occur across the landscape and create more problems than it will solve any lending issues.

Paul Wiebusch, Deloitte financial services partner, questioned the impact of the implementation of comprehensive credit reporting (CCR) and open banking will have on high-risk customers.

Wiebusch said, “You can see what will happen for those who are lower-risk customers, who might be paying more than they need to at the moment. But at the other end of the spectrum, will this have an implication for higher-risk customers and potentially a desire to increase pricing for higher-risk customers?”

Wiebusch cautioned that if lenders being rate hikes for higher-risk customers in a setting where the ASIC and the ACCC are currently examining rate setting, there could be major ramifications to follow.

He thinks the elevated focus on “conduct-related” concerns will have implications for organisations’ strategic options when they examine their pricing responses.

According to Deloitte, he thinks that financial entities should be looking at all three of the components when pricing their framework. These three components include customer lifetime value, price elasticity, and profitability.

First Choice Mortgage Brokers are a Sydney Mortgage Broker operating under the Australian Credit Licence Number: 38237

Carol Bagaric – Katoomba NSW

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Hello all,

Thank you so much for the lovely hamper I was thrilled to receive it, such a treat.

So grateful to you all for helping me sort out my finances and getting me back on track, the relief I am feeling from this refinance is huge!

Thanks guys, I will strongly recommend you to others who may be looking for loans, re finances etc.

Regards

Carol Bagaric
Katoomba NSW

Reese and Jacqueline Webb – Penrith NSW

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Hi Annette, Anna and Beth and the rest of the team at First Choice Mortgage Brokers,

Reese and I would like to take this opportunity to thank you all very much for your compassion
and assistance you have given us through our loan application and right through to settlement.

We also wish to thank you all for the gorgeous hamper we received from you, we were so
emotionally touched by this warm and loving gesture.

Our process of applying for our loan refinance was such a stress-free experience with you all guiding us every step of the way.

Thank you all again very much, you are an amazing team and we will not hesitate to refer
you to our friends and family.

With heartfelt thanks,

Reese and Jacqueline Webb
Penrith NSW

Trent and Diana – Gladesville NSW

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Good morning all,

Thank you so much for the lovely hamper that arrived yesterday, incredibly thoughtful and very much appreciated.

Your collective efforts from pre-approval to settlement were outstanding.

All extremely competent, very communicative and proactive – most importantly a pleasure to deal with.

Our side, as the purchaser, was handled with so much finesse, the vendors team looked a little slack in comparison.

Again, thank you all so much

Regards

Trent and Diana
Gladesville NSW