From 1 January 2021, new Best Interest Duty (BID) laws came into effect for mortgage brokers and financial advisers. This could change the way that Australians search for home loans, and how finance professionals offer their advice.
What is Best Interest Duty?
According to the new laws that came into effect from the start of 2021, mortgage brokers are now required to act in the best interest of a client when providing financial advice. Previous BID rules had been in effect for financial advisers since 2013, though the new reforms now apply the duty to mortgage brokers.
In the past, responsible lending obligations said that mortgage brokers had to provide mortgage deals that wereist “not unsuitable” for their clients. In other words, while mortgage brokers couldn’t knowingly offer you a loan you couldn’t afford, they weren’t required to always offer you the best option for your circumstances.
The risk here was that brokers could theoretically recommend home loans that paid them the highest commissions, rather than the offers that were in the client’s best interest.
Following the Banking Royal Commission, legislation was introduced to bring an end to these conflicts of interest, by ensuring that mortgage brokers have a duty to act in the best interest of their clients. After passing parliament, Best Interest Duty was intended to be introduced at the end of June 2020. However the COVID-19 pandemic and recession led to this being pushed back while the nation’s economy was under pressure (though other responsible lending rules could be scrapped in the future)
How does Best Interest Duty work?
Generally, BID requires that mortgage brokers act in the best interest of the borrower when recommending home loan offers, and prioritise the consumer if there are any potential conflicts of interest.
The BID legislation takes into account that the best home loan for a borrower may not always be the one with the lowest interest rate or fees. Depending on a borrower’s financial goals, sometimes the right home loan features and benefits may offer more value than just a lower price.
Similarly, if a borrower asks for a loan that may not be in their own best interest, such as insisting on a mortgage from a favourite lender even though they charge higher fees, or wanting a loan that offers particular feature that they’re unlikely to qualify for, a broker will be obliged to inform the borrower that there may be better choices out there.
Keep in mind that these rules only apply to mortgage brokers and financial advisers – they don’t apply to banks or mortgage lenders themselves. If you approach a bank directly to apply for a home loan, they aren’t required to offer you the best possible deal for your needs.
What this means for you
If you ever had doubts about whether a mortgage broker will offer you good advice, you can rest a little easier in 2021. This new legislation is intended to help minimise the risk of conflicts of interest from mortgage brokers between the borrowers they work for and the banks that pay them.
Even if a loan from a particular bank or lender will pay the broker a higher commission, they shouldn’t be recommending it to you unless the bank’s offer is also in your own best interest.
Before or after you’ve contacted a mortgage broker, it may be worthwhile to compare home loan options to learn more about what’s available in the mortgage market, and which options may best suit your needs. If your broker advises for or against a home loan you’ve had your eye on, you can be that little bit more confident in their personal financial advice.