One of Australia’s biggest mortgage provider groups has tweaked how broker commissions are refunded when people take their business elsewhere, as borrowers refinance in large numbers to take advantage of record low interest rates.
Australian Finance Group (AFG) will now recoup 100 per cent of a broker’s commission for the first three months if a borrower refinances or pays off the home loan, followed by a monthly proportionate step-down for the remaining 21 months of the two-year clawback period.
This applies to AFG Retro and AFG Link home loans funded by the company’s in-house lending division, AFG Securities, settled from September 15.
Normally, lenders clawback the full amount of the commission if the mortgage is refinanced or paid off in the first year, before the clawback falls to a smaller amount in the second year.
Many brokers often pass this on to their customers as a fee, so they can still be paid for their work.
AFG Securities’ general manager Damian Percy said the current clawback cliffs are “arbitrary and need to change”.
“Lenders will assert that upfront commissions should reflect the value that the broker delivers and must necessarily recognise that a loan that only lasts a year or two is, at best, a break-even proposition for the lender,” he said.
“In contrast, brokers can reasonably argue that the arbitrary clawback ‘cliffs’ that exist today simply don’t reflect the fact that as time goes on the lender’s position improves.”
Mr Percy questioned whether the traditional clawback policy supports the best interest duty of mortgage brokers.
“There still should be recognition that a loan that discharges very shortly after settlement was arguably a poor transaction for all concerned,” he said.
Are clawbacks good or bad for consumers?
Some critics argue that passing clawbacks onto the borrower can undermine any savings they may tap into from low interest rates.
About 80 per cent of mortgage holders would not consider a broker who passes on the clawback fee to the borrower, a survey commissioned by uno Home Loans in 2018 showed.
The same proportion of respondents were not aware of what clawback clauses were.
It is estimated that 5 per cent of brokers pass clawbacks onto clients, according to the survey.
“Clawbacks can be a barrier to acting in the customer’s best interest in some cases,” founder of uno Home Loans, Vincent Turner, told RateCity.
“We believe that a commission model that aligns to the best interests of the customer should be where we head as an industry.”
But Blake Buchanan, general manager of Specialist Finance Group, acknowledged that while clawbacks needed reform, they should be done without undermining competition in the mortgage lender market.
“To remove clawbacks entirely would likely increase costs to the end user and… could result in a more concentrated market. Fewer competitors usually means higher margins in any market,” he said.
Mr Buchanan said clawbacks help encourage brokers to connect borrowers with home loans that could be the best option for them.
“Clawbacks reduce the potential churning of finance by incentivising the broker to make the best product selection, (due to a) lower chance of refinancing or paying out a loan within 24 months, from the outset,” he said.
Mr Buchanan said clawbacks can help drive healthy competition and even out the playing field between smaller and bigger lenders, potentially benefiting everyday mortgage holders with lower interest rates.
“What this has driven is a more price-competitive market where small lenders can compete with larger lenders… and make them reduce their rates and fees to compete for your loan.”
The refinancing boom
AFG’s decision comes as new data reveals an increase in refinancing during the COVID-19 pandemic and the tougher lender competition it has fuelled.
More than 113,000 Australians have changed their mortgage lenders, refinancing to the tune of $53.7 billion worth of home loans in the four months to July, the latest figures from Australian Bureau of Statistics showed.
The rise of refinancing may mean a higher chance of more consumers being hit with a clawback.
If you are considering refinancing, it could be a good idea to ask your current broker:
- whether they would pass on any clawbacks to you if you were to switch, and
- if so, how much the fee would be.
It may be worthwhile to weigh this fee up against the benefits of refinancing to see if switching stacks up for you. You should also ask about clawbacks to any brokers you may be in talks with for a new home loan.