In the media: AFR – The impact and conflict of digital loans for brokers

With the mortgage broker proposition now originating over 70% of home loans nationally, some of the major lenders are launching in house products in direct conflict with their distribution channels.
This weekends Australian Financial Review interviewed Equilibria Finance Managing Director Anthony Landahl as part of their piece on CBA’s to be launched digital loan and the issue of channel conflict.

Click here for link to article in AFR

Article content below.

CBA preps ultra-cheap loan amid war with brokers

Australian Financial Review: 25^th May 2024

Article by Lucas Baird

Commonwealth Bank will launch a new digital-only mortgage product that will push in-house lending at the expense of less profitable broker-originated loans, igniting frustration within the industry about the major bank cutting brokers out of deals.

Known in the industry as channel conflict, major lenders are going straight to customers threatening to leave for a rival, even after they had already engaged a mortgage broker to find the best deal, brokers say. The customers are offered a better rate than those available to the brokers which, if accepted, means brokers do not earn their commission.

Anthony Landahl, managing director of Equilibria Finance in Sydney’s CBD, said CBA was the most aggressive bank employing these tactics.

“It’s disappointing and is frustrating to the extent that brokers have access to a large panel of lenders for our clients, and, ultimately, we just want to get the best outcome for that client,” Mr Landahl said. “It does disrupt the client experience, and it is not always in the best interest of the customer.”

Brokers drive a large amount of loan traffic to the major banks, but lenders, most notably National Australia Bank chief executive Andrew Irvine, have complained that a payment structure including upfront and trailing commissions make it almost impossible to write mortgages above the cost of capital.

CBA will on Monday launch its Digi Home Loan product that, starting at an interest rate of 6.15 per cent, is the cheapest advertised home loan the bank will offer either through its proprietary or broker channels. Eligibility will be limited to new-to-bank customers who are refinancing their home loan from a different financial institution, when it launches. The product will be available only through the CBA’s app and website, not through either of its mortgage broker channel or its branches.

CBA executive Michael Baumann said the new home loan product was made to service the “growing number of customers seeking a self-managed, digital home lending experience”.

Anthony Landahl started his brokering business Equilibria Finance seven years ago after a career in the financial planning sector.

“For those customers who value face-to-face support in the home loan journey, they can and will continue to benefit from the personalised home loan service that comes via our network of CBA lenders or mortgage brokers,” Mr Baumann said.

CBA is the only bank that has been able to reduce its reliance on brokers in the past three years. Morgan Stanley analyst Richard Wiles said that brokers contributed 48 per cent of the bank’s new loan flow in 2019. This was now just 43 per cent.

Broker loans represent more than 60 per cent of new loan flows at NAB, Westpac and ANZ, an increase of 15-20 percentage points in the past three years.

“CBA bucked the trend, but its mortgage portfolio didn’t grow during the period,” Mr Wiles said. “We think this highlights the importance of broker distribution for banks which aim to grow at or above-system.”

Mr Landahl said CBA had misconceived broker pay when it scrapped Hayne-era caps on bank bonuses, lifting the maximum annual bonus for in-house lenders from 50 per cent of base pay to 80 per cent. “For someone to walk away from a $350,000 a year job at a bank to go straight to brokering to earn much more just doesn’t happen,” he said. “It takes time to build your client base, business and income streams, and not everyone has the appetite for it.”

CBA retail banking boss Angus Sullivan said, “we do see some of our lenders leave to the broker channel, where there is a big difference in remuneration, which is 100 per cent commission based,” to justify the decision last month.

But Mr Landahl, who started his firm seven years ago following a career in the financial advice sector, said: “The people leaving the banks are not doing it because of pay.”

He said if a broker settled 80 loans in a year at an average value of $600,000, they would generate an income of about $285,000 for the business. “And that is turnover, not take-home pay,” Mr Landahl said, with business costs like premises, staff and technology eating into the broker’s overall remuneration.

The Mortgage and Finance Association of Australia, the industry body for brokers, says the average broker remuneration in the year to March 31 was $181,199.

While the Hayne royal commission’s recommendations on broker pay – such as making borrowers pay rather than lenders and ending trail commissions – were largely ignored, Mr Landahl said a so-called best interests duty introduced in 2020 ensured customer outcomes were prioritised. “We are regulated by that, we have to follow it legally, and the banks are not subject to those same rules.”

Anthony Landahl | Managing Director Equilibria Finance

This is for general information purposes only and does not constitute advice. With all of these options there are a number of considerations outside the scope of what is covered in this article that you need to understand to ensure your personal circumstances are taken into consideration.

Equilibria Finance is a mortgage broking practice specialising in delivering residential and commercial mortgage and business and asset finance solutions to the clients of financial advice and accounting practices.