Mortgage brokers earn far too much for the service they offer and by slashing the commissions the banks can offset the new bank levy, according to UBS.
Commissions paid out to brokers exceeded $2.4 billion in 2015, up from $1.46 billion in 2012. Average commissions were $4,623 a mortgage in 2015, up from $4300 three years earlier. The fees accounted for 23% of the cost of a major banks entire personal and consumer banking unit and such commissions add 16 basis points to every mortgage in Australia, UBS analysts led by Jonathan Mott and Rachel Bentvelzen said in a note titled “Are mortgage brokers overpaid?”
The $6.2 billion levy imposed on the banks in the federal budget is seen cutting major bank profits by as much as 6% and lenders have publicly declared that the pain will have to be either borne by shareholders or borrowers and depositors.
The banks will have to increase mortgage rates by 14 basis points to meet the cost of levy, Goldman Sachs analysts concluded.
Instead, UBS now thinks the banks can slash mortgage broker commissions and pass on the cost savings to customers and thereby offset the levy.
They point to mortgage broker commission outstripping fees charged by financial advisors by a factor of more than six and given the advice is for a simple and single product, there is scope to reduce it.
“We believe these payments are an illustration of excesses built into the financial system following a 26 year economic boom,” they said referring to the Australian economy’s recession free run. “We believe advice for a commoditised, single product such as a mortgage can be easily provided by robo-advice. The current quantum of economic rent being extracted by the mortgage broking industry is unrealistic and is likely to fall dramatically in coming years.”
This table from UBS illustrates the big bucks involved in mortgage broking
“Over coming months we expect the banks to begin negotiating materially lower commission rates from the mortgage brokers on a fee-for-service basis to comply,” with new regulatory recommendations, the analysts said. The “housing lending market remains competitive and we would expect any reduction in mortgage broker commissions to eventually be competed away by the banks. This is beneficial for customers and should help offset the additional repricing expected by the banks as they adopt the new Bank Levy.”
Federal treasurer Scott Morrison on Tuesday unveiled a major bank levy, a six-basis point charge on the big banks’ liabilities. The tax starts from July 1 and will only affect five lenders with assessed liabilities of $100 billion: the ANZ, CBA, NAB, Westpac and Macquarie.