What is Best Interests Duty for brokers and why is it important?

The days of wondering if a mortgage broker was recommending you a home loan because it was the best for you, or because it paid them the best commission are over, thanks to Best Interests Duty.

From 1 January 2021, Best Interests Duty laws came into effect for mortgage brokers and financial advisers. These new regulations have changed the way that Australians search for home loans, and how finance professionals offer their advice. 

What is Best Interests Duty?

In the past, mortgage brokers were not obligated to always offer you the best home loan option for your circumstances. Responsible lending obligations said that mortgage brokers had to provide mortgage deals that were “not unsuitable” for their clients. So, while the home loan had to be one you could afford, it didn’t have to be your best option.

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.

Best Interests Duty enforces that mortgage brokers are required to act in the best interest of a client when providing financial advice.

Previous Best Interest Duty rules had been in effect for financial advisers since 2013, though the new reforms now apply the duty to mortgage brokers. 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. 

How does Best Interests Duty work?

Generally, Best Interests Duty 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 Best Interests Duty 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 Best Interests Duty means for your home loan

If you ever had doubts about whether a mortgage broker will offer you good advice, you can rest a little easier nowadays. This legislation helps 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.

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