16 January 2013
For this post, I will attempt to break down the fundamental cost basis and value proposition of the mortgage advice that is offered by thousands of people in our industry.
Brokers, branches, online lenders, lenders over the phone, mobile bankers and so on. They all provide advice and assistance (in various forms) about mortgages. Most provide this advice for “free” so it is easy to perceive this advice as basic and generic. In reality though, many people underestimate the complexity of lending and mortgages and assume it is the so called ‘sausage factory’ – relatively simple and straightforward with similar inputs and outputs every time, not requiring much thought or differentiation/advice. Such an approach is misguided and reveals a lack of understanding of the dynamics at play.
The crux of the matter is that even though the advice received may seem “free”, the reality is that customers are paying for it in some form. Banks spend millions on providing branches for customers to visit and spend further millions hiring people to talk about mortgages and provide advice. They spend money on call centre operators, on mobile bankers, on web sites. And they spend money on brokers by paying them commissions to provide advice and assistance to customers who need a loan. Of course all of this money needs to be recouped. And it is - through the price of the customer’s loan - the interest rate. There is effectively an “advice” (or distribution) cost built in to every mortgage, so why not take advantage of it and get the best advice possible? Obtaining a mortgage is an important decision and the difference between average/general advice and outstanding/tailored advice can be thousands of dollars in a customer’s back pocket.
Some lenders in the market have limited advice structures, for example direct or online lenders, and most of these direct/limited advice lenders therefore don’t deal with the broking market. Thus, the ‘advice costs’ built into their mortgages are lower. But of course the flip side is that the quality, suitability and structure of these products is often therefore not appropriate for the customers and it will end up costing them more. Furthermore, because of the limited advice offered, many customers will not be in a position to make the right product and structure choices, which is crucial in developing an appropriate lending portfolio.
So, as much as talking to/seeing a branch staffer or broker may seem “free”, keep in mind that the customer is effectively paying for the provision of this service. It is therefore crucial to seek out and obtain the best advice available. Where to obtain such advice? Well, to paraphrase an industry participant, why would a customer go to a bank to get a home loan, when they can go to one broker and have 30 odd lenders presented to them by a professional person who makes their living making sure the customer is happy? Why wouldn’t you go to a broker?
Chris Purtill
Director
Beyond Home Loans