Forum Replies Created
Gidday Alistair,
Borrowers interested in saving the 18% of loan amount (or 12.55% in interest and fees) can see the mortgage rebates they receive form at least one ORP mortgage broker paying them here:
http://www.matesratesmortgagebrokers.com.au/mates_rates_mortgage_broker_commissions.html
I am unsure of your motivation, however you are misrepresenting both the commissions paid and the effect of the savings.
As previously explained, my modelling is based on the rates and rebate cash flow timings that borrowers can and do receive in real life cases. Knowledgeable borrowers have been making these savings for the better part of a decade.
I believe the investment theory you are attempting to name is 'Time value of Money', which is impossible to address in a dollar based saving calculation
However, it can be demonstrated using an internal rate of return which is also the basis of the MCR legislation. There are problems with using IRR because the loans wind up with different terms (i.e. the rebated loan pays out faster).
In the case of the $450,000 this would be demonstrated by:
– Retail AAPR: 7.22% for 30.0 Years
– Mortgage Rebate AAPR: 6.98% for 27.8 YearsIn simple terms, the mortgage rebate borrowers loan has a lower effective rate whilst they remain in debt, BUT they also become debt free 2.2 years sooner. The borrower taking retail has over two extra years of repayments at the higher rate of 7.22%.
This demonstrates the shortfall of Time Value of Money is it does not allow for the added value realised by borrowers through becoming debt free 2.2 years sooner. This becomes an invaluable benefit.
In terms of the offset, you may recall my earlier post when I stated borrowers either put the money in actual loan or a 100% offset facility, so I think you are just being a little mischievous here.
Of course none of this changes the reality that a borrower with this scenario is saving the 18% of loan amount (or 12.55% in interest and fees) by using a broker paying mortgage rebates over one that doesn't.
That would be 'n' as in 'no' intention to mislead.
Thanks Dan42,
I appreciate your perspective, however you will see me state time and time again that it is expressed as a portion of the loan amount. If these two ideas became separated somewhere along the way, I apologise.
As a point of clarification, the retail cost of this home loan (ie. fees and charges) adopting the variables above is $651,417.
This means borrowers can reduce the amount of interest and fees they pay by around 12.55% using the ORP mortgage broker over going retail.
Again, I would like to point out that I have not modelled at the higher final trail rate, so savings in this example would be greater again. I'll rework the model to include Year 6+ trails and provide a more accurate saving for this borrower scenario when I have a mo.
Thanks for the feedback, I'll watch my messages as there I have n intention to mislead because borrowers deserve the truth.
Gidday Lukentel,
You are incorrect. The 18%+ saving on loan amount is based on real life examples (although plugging in the NAB-Homeside commissions which you have understated).
I understand why you are cynical about mortgage matters given there is so much baloney out there. Being able to objectively cut through that baloney is how I got my job and ORP and SRP mortgage brokers are legitimate broker models that have been operating throughout Australia for many years.
Arguments about sustainability went out the door years ago, because the mortgage rebate brokers are still here and they are still doing it. I'm sure that if they were dodgy, people like Richard and Alistair who are so keen to poo-poo them would have had them thrown out by ASIC, the MFAA or FBAA by now. They haven't because the mortgage rebate brokers do what they say they do and the savings to the borrower are real.
I also understand your difficulty in grasping the concept because you keep applying the idea to you as a mortgage broker, your values, your experience and your commission, so you can't make it add up. However, it isn't about you.
It's about the borrowers. One of whom originally raised this post.
As difficult as it may be for you to accept, these brokers are more committed to the needs of borrowers than you are and as a consequence, save the borrowers around 18% of their loan amount for this $450,000 example.Again, if you are struggling with the actual math, let me know. Finance is just numbers and I'm surprised the loan amortisation is proving so hard for the professionals.
The borrowers saving you should come up with is 18.147% (flatting year 5 onwards @ 0.30% p.a. rebate) for the identical loan through a lower cost mortgage broker.
Thanks for taking the time to work with the idea and good luck if you ever decide to re-introduce mortgage rebates to your business. Borrowers will always benefit from more brokers willing to do it.
Gidday Dan,
This tracks back to a matter that Alistair disagrees with.
Borrowers I spoke with have the rebates paid directly to their mortgage accounts and this in turn creates interest offset savings in addition to the 'free' money they get from the mortgage rebates.
So the saving that is realised are:
Mortgage Rebates paid to the borrower + Interest Offsets from those Mortgage Rebate deposits = Total Saving
It's just like paying a little extra each month into your account, only the broker is doing it for you.
Gidday Alistair,
I presume you are referring to the savings to the borrower of 18% in the above example (actually it's probably higher as I didn't model the 6 year+ step in because NAB – Homeside are the exception as you know.)
If so, I'm not sure what you don't understand as this is the same basic modelling you would need to use to get to make recommendations to borrowers on any loan (assuming cost factors in your recommendation somewhere).
To get the savings, model mortgage rebate cost on:
– Loan Amount $450,000
– Monthly P&I (Interest only savings would be far more significant)
– Term 30 Years
– Normalise the interest rate +2% (because SVR has averaged at around 7.10% since April 1994)
– 1st rebate at settlement + 3 months (because it is unlikely to happen on the day of settlement)
– 100% of trail rebated monthly to the loan account (I know you disagree that borrowers should do this, but it saves interest and is what borrowers I interviewed prefer to do)Then;
(Retail Cost – Mortgage Rebate Cost) / Original Loan Amount x 100
As per my note, NAB Homeside savings are over 18% of loan amount for borrowers who take their loan via an ORP mortgage broker over brokers that keep the commission for themselves although again, I maxed the out years at 0.30% p.a. when it actually steps to 0.35%. ie, mortgage rebate savings will be much larger.
Let me know if you are struggling and I will help out.
Gidday Lukentel,
Good point. NAB’s Homeside products have generous commissions.
Instead of saving up to 15% with an ORP mortgage broker, NAB’s Homeside borrowers would save 18% with the identical product compared to obtaining it through a non rebating broker – Yikes!I tend not to focus on NAB as they are quite unique, including their approach on Star Ratings, but let’s take a look at that.
The brand new broker would be given a default rating of 3 stars. If we assume the experienced broker is achieving all targets, they get a rating of 4 stars. The impact is a +0.05% Upfront Boost to the 4 star broker. So let’s get that into context. On a $450,000 the difference is:
– 3 star broker will earn a total of $28,435
– 4 star broker will earn a total of $28,210Not a lot in it really. But you are right, there may be a difference, it's just hard to spot. However getting back to my original point that quality of advice has no bearing on mortgage brokers’ income.
NAB’s Star Ratings have no bearing on the quality of advice, except to place a slight penalty on brokers undertaking predatory lending assuming 1% or more of their entire portfolio is in arrears. (Don’t we all want to get rid of those brokers anyway?).
1. Up to two stars for achieving a conversion ratio >= 80% (conversion ratio is of course, a sales target).
2. Up to one star is for having entry level qualifications, which can be achieved in less than a week of part time study.
3. Then there’s the fourth star for 99% their loans staying out of arrears. i.e. profitable (again, another sales target).As you point out yourself, Westpac’s commission is the same regardless and that is true for virtually every other lender using brokers as a sales channel.
On your point regarding differences between aggregators, I originally stated rates vary between aggregators. I think that it makes sense for you to shop around to get more commission and it doesn’t surprise me that you did.
In so far as how clawback affects mortgage rebate brokers, the answer is that at least one of the long standing brokers that do it also protects borrowers against clawback. ie. The mortgage rebate is paid to the borrower for keeps – it has no impact on the borrower at all, no matter what happens.
So yes, the experienced broker may earn a teeny, tiny bit more and borrowers arranging their NAB Homeside loan can save around 18% of their loan amount if they get it through the right broker.
I hope this helps and thanks for the post.Gidday PosEnterprises,
RHG isn't one we track too closely for obvious reasons.
Last update for 2 year fixed was suitably horrifying at 8.05% as at June this year which is slightly less ridiculous today than it was back then, but not by much.
It may or may not have moved since and if you are thinking about fixing for 2 with RHG, you might also want to way up the cost of breaking.
Hello Vucko,
Rates are the retail rack rates and do not include significant savings from:
1. MAV/Wealth discounts – 0.15% p.a. off Fixed Rates and;
2. ORP Mortgage Rebates – 0.20% p.a. Y2 onwardsSo the effective rates are quite a bit lower if you structured and sourced with these in mind.
In view of the my delay, I've compiled and charted 1 thru 5 year fixed and threw in some bonus months as a way of saying sorry for the delay.
I didn't bother with trending as the data sample is too small and anything other than a moving average will demonstrate a downward trend which is probably a little misleading.
Anyhow, you can download the pdf with charting and tables from here:
http://www.keyfacts.com.au/cba/Mortgage_Interest_Rates_Commonwealth_Bank_Fixed_Rates.pdf
Let me know how you go.
Gidday Vucko84,
Sorry, I have been off work due to personal matters – I'll compile the data across the weekend and post it for you early next week (hopefully Monday!)
Gidday Vucko,
Sorry, I need you to pick 3 or 5 years and a 12 month window. Remember, this is a freebie.
Don't ask, don't get Richard.
Gidday Terry,
Remember, we are talking about brokers that rebate up to 100% of trailing commission in the case of ORP. Like you, those firms and brokers don't have to, they simply want to help borrowers leap ahead further than the next guy or gal (you'd have to agree that 15% of the loan amount in savings is a BIG boost).
On that note, I'll take the Australian Oxford English Dictionary on 'decent' which defines the word as: kind, obliging, generous.
So yes, clearly brokers paying mortgage rebates through sharing commissions are not just decent, but arguably more decent than those who don't – according to the dictionary and I suppose, clients who support those brokers.
As for experience, firms paying mortgage rebates in Australia date back to 2000, which is as old as your company Terry, and over half a decade longer than Taylored Financial Solutions Pty Limited.
Which shows the idea clearly isn't new and the experience is not as light on as you are so willing to assume. Although you are challenged to admit it, people behind those businesses are simply more generous to borrowers than you are willing to be.
So there's the challenge gents, why not be more decent? It's clearly possible and surely is the right thing to do.
A 15% shot in the arm for your borrowers. Seems pretty decent to me.
Gidday Vucko84,
If you can give me a specific Fixed term (i.e. 3 years), I can get that for you.
Gidday Julito,
The short answer is that Lenders Mortgage Insurance insures the lender, which means they can decide when it is necessary and when it is not – A lender can charge LMI at an LVR of 20% if they want to. It's up to the lender and it's one of those costs which is not in the Comparison Rate and often overlooked by the rate focussed shopper.
80%, whilst being a generally accepted threshold, is not a hard and fast rule at all. It depends on lender, product and a range of other things. Even the majors have reduced LVR's for certain products such as Low Document loans etc.
You can ask your lender to review the fees (don't ask, don't get), but really you are now starting to see the real price of choosing this lender in the first place. If they say no to waiving fees, you either pay it, or move on.
Thanks APerry,
That's okay, it seems assumption rules in places like this.
On quality:
I think your perspective that brokers that rebate commission are inferior is flawed. Quite clearly the commission Broker A gets paid with Lender A is exactly the same as completely inexperienced Broker B who just wrote his/her first loan with Lender A (assuming the same aggregator). It therefore follows that earnings do not reflect experience or capability.I have interviewed quite a few customers of rebate brokers both simple and complex. At least two of them who went with the most generous ORP Broker had extremely complex mixes and requirements (i.e. multi (not two or three) million dollar portfolios, mix of investment vehicles and jv structures and in one case mixes of local and foreign income). They have used this particular ORP broker for years and wouldn't think of going anywhere else.
On savings:
I'm not sure what is ridiculous about depositing the rebates against the loan to deliver offset savings. However I struggle to understand why someone who takes pride in being both in the industry and skilled, would suggest that the borrower shouldn't do it.
If they did, the 15% of loan amount is achievable on a product as simple as ING's Mortgage Simplifier (smart packed) assuming a normalised rate of 7.03%. Ironically, this is product carries the exact trail rate you quoted, which as you would also be aware is the lowest in the industry (save again, for a few scant exceptions). So greater savings are highly accessible.
On whether the borrower pays commission:
I fear it's you that's playing with semantics. There is nothing even slightly incorrect about my explanatory paragraph and what I did include (as I usually do) was the statement that "(if the lender doesn't pass it on to a broker, they call it profit)". I refer to it as profit as the branch staff and related infrastructure and on costs are fixed, ergo an extra sale for the lender = profit.
And finally for you Terry. I can't see what is indecent about a business that is willing to give the borrower a better deal than the broker up the road. It seems a simple matter of how much a broker values commission over the interests of the borrower.
Gidday again APerry,
I'm not altogether clear on what fired you up, or why you feel the need to 'throw' things back at me, however here are the answers to the questions you raise.
I agree that borrowers often get the same lender terms (I presume you mean the loan contract terms), whether they obtain their loan directly from the lender or via a broker.
So let's assume a borrower is rebated commission (which a lender just won't do, but a broker might) and the borrower deposits that rebate against their loan (via offset or the loan account itself).
That borrower then pays a lower effective rate than they would had they obtained the identical loan from the lender directly or a broker that won't pay a mortgage rebate.
As a result, regardless of the loan contract and lender terms, the borrower pays a reduced effective rate for the identical mortgage.
In plain English borrowers get the same thing, spending quite a bit less money.
Although that may not be important to you, it might be to others, especially when mortgage rebates and offset savings can represent 15% of their actual borrowings.
It is also worth pointing out that brokers offer important value add services including the ability to maintain rapport and service regardless of a borrowers need to switch lenders; the ability to offer comparative analysis and quite a few other factors.It therefore follows that, if you can get the loan you want from a broker, then it's definitely worth thinking about getting it through a broker rather than going direct. This argument fortifies if the broker pays either ORP or an SRP as a part of their offering.
Again importantly, from time to time, brokers do get better deals than retail and vice versa. Although this is true across all lenders, there is no clearer example than NAB Broker vs Homeside.
However there may also be individual factors too where the skill of a broker in deal submission may ecxceed that of the lenders branch service officer. This could mean deals may receive more favourable treatment than if submitted directly, which could be the difference between acceptance and declinature as well as a range of other concessions.
The simple fact is that, from time to time, terms between channels vary and borrower outcomes such as cost, can be independent of the loan contract terms. It is simply incorrect to suggest otherwise. (i.e. via mortgage rebates etc).
As for the 'advice' you're suggesting I dispense, I'm not sure exactly what you mean. Wherever I write, I make a genuine attempt to deliver as a complete a truth I can, in the most balanced way possible where any bias that might prevail is in favour of the borrower.
And of course finally commission. Regardless of who is collecting the commission it is the borrower who pays it (if the lender doesn't pass it on to a broker, they call it profit). This never more clear than when a borrower ceases to make loan repayments and trail commission payments also cease. For the sake of completeness, this obviously does not include NAB Broker or Bluestone any other anomaly that PV commission rather than pay trail.
I hope that clears it up for you.
Thanks APerry,
My focus is strictly mortgage broking – that sector is complex enough as it is.
You raise an interesting point on mortgage broker commissions when you write "why worry if the broker gets paid, particularly if they give you good advice" and there are any number of responses that come to mind.
For example, how does the borrower really know if they are getting 'good' advice. Okay, acknowledged they hopefully aren't getting rubbish advice, but 'good' is a very open concept.
And on that point, how does the borrower 'value' that advice if the fee is hidden to the point it is not really understood, Of course I know that disclosure exists etc, however I have neverinterviewed a borrower that gets within cooee when they tell me what they THINK the lender pays and what the lender ACTUALLY pays. Then there's conflict of interest etc.
But put all that stuff aside and ask this question. If a broker who shares their commission with you gives you as good or better advice than one who keeps it all, why shouldn't you worry?
After all the commissions come directly from the borrowers repayments, so really, it's there money.
Hey, thanks for the support, but the opportunity has closed as the article has to be put to bed early next week.
However if they are interested in future opportunities, they can reach me via my profile on this board. That seems to work fine as I have had quite a bit of off forum conversation around this article.
Thank you again.
Gidday Daniel,
You're on the right track.
I only wrote about experienced models for YMM to offer some degree of certainty to the readership, although there are two standouts that are very green (i.e. a few years old), but it's slim pickings on ORP options because it seems to take a special and rare kind of business ethic.
And Yes also on the post. The scaremongering aimed at you was almost as impressive as it was wrong. It came from a place of ignorance, especially the furphy "you get what you pay for". Whilst that can be true, it's worth pausing to consider what you are getting and what you are paying.
On a $450,000, the ORP Broker still stands to make around $2,700, so they are still getting paid quite handsomely, even though they bonus the trailing commission to you.
Adopting Richards lender example, Homeside, the trail on a $450k loan @ 30 years is close to $25,000 – much more if the loan is interest only (think about that next time a broker or lender recommends you take interest only).
It's also important to realise the MyRate product seemed cheap, but you could have gotten the real ING deal from ING Direct through an ORP broker for thousands less.
So you don't always get what you pay for. Sometimes you pay more and you get less.
