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Deferred establishment fees (DEFs) deter nearly two thirds of brokers from recommending non-bank products, a recent Mortgage Business straw poll has revealed.
DEFs are typically charged by lenders to allow a consumer to enter into a home loan contract for the minimum amount of upfront cost or to support a subsidised interest rate for a period of time.
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According to Rob Emmett, CEO of Collins Securities, under a typical DEF structure the costs of originating a loan – including establishment, valuation, legal fees, mortgage insurance and broker commissions – are funded by the lender and gradually recouped from margin income over a period of 3 to 5 years.
“As a general rule, specialty products and those with higher funding costs will have a higher DEF structure incorporated into the loan contract,” he says.
Chris Mills, a Perth-based broker from Four Peaks Finance, said selling non-bank products is made all the harder by justifying the high exit fees to the client.
“It’s just too hard explaining to a borrower why they get slugged with a big penalty if they want out of their loan after three years,” he said.
But Justin Doobov of Intelligent Finance in Sydney said DEFs – so long as they were reasonable – were needed to prevent customers from too-ing and fro-ing incessantly between lenders.
DEFs were reasonable, Mr Doobov said, so long as a product’s competitiveness compared to the wider market hadn’t changed.
“If the interest rate on the product should move, for example, any more than half a percentage point above the original price difference between the rate and the average bank SVR, then the fee should no longer apply.”
In response to broker concern over DEFs, Mr Emmett said that as banks pull back from their core customer base through credit policy change a market opportunity is quickly emerging.
He said that non-banks can differentiate by offering lower deferred establishment fee structures and that Collins Securities is about to introduce a 95 per cent LVR product for first home buyers without the traditional DEF structure.
