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Brokers are key to holding lenders to account to ensure borrowers are on a competitive rate and avoid being “loyalty taxed”, the CEO of Lendi has told MPs.
The CEO of Lendi Group, David Hyman, made the argument while appearing before the House of Representatives standing committee of economics for its review of Australia’s four major banks and other financial institutions last week (29 July).
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During the review hearings, the deputy chair of the standing committee on economics, Dr Andrew Leigh (member for Fenner), asked about how much of a mortgage broker’s business is based on refinancing clients.
Dr Leigh noted that banks have been found to impose a “loyalty tax” on existing borrowers while offering better deals to new customers, “therefore forcing customers to go into this endless cycle of refinancing”, which has been at record-high levels.
Mr Hyman acknowledged that loyalty tax is a “real issue” and explained that borrowers refinancing their mortgages through Lendi Group brokers tend to save, on average, between 76 and 84 bps, depending on where they are in the loan cycle.
“It’s tens of thousands of dollars over the life of the loan. It’s definitely an issue, if you look at the flows.”
Mr Hyman outlined that refinancers comprise around a third of the market (with the rest being purchasers) adding that refinancing spiked around May and June 2020 following the onset of the coronavirus pandemic in Australia.
“So, not all transactions are necessarily driven by someone wanting to go from one rate to the other, but it’s (loyalty tax) definitely one of the drivers behind refinancing,” he said.
Dr Leigh argued that lenders could benefit from the “confusopoly” and greater complexity in the market, while mortgage brokers could benefit from the refinancing process.
However, Mr Hyman explained that refinancing is not necessarily always in the mortgage broker’s or customer’s best interests, as it could result in fees.
He also clarified the role of a mortgage broker in repricing their clients with their existing lender, stating: “One of the services a mortgage broker provides to a customer is that ongoing review…
“Quite often, the service the mortgage broker provides a customer might be to make sure they’re on the right rate with the lender, and hold the lender to account.”
Competitive window for lenders on loan deals
Dr Leigh argued that refinancing is a “huge” waste of time for borrowers, asking: “Is there any way we can get out of this trap that we’ve got into as a society – just wasting people’s time refinancing mortgages every few years in order to get the best deal in the market?”
Mr Hyman responded that herein lies a competitive opportunity and pointed out that some new lenders have launched with this very promise.
“I think it’s an opportunity for new players to come into the market or for other banks and lenders to differentiate themselves,” Mr Hyman said.
“It really depends on your philosophical stance on regulation versus a free market.”
Dr Leigh asked if introducing more tracker mortgages in the market similar to global counterparts (which would track official cash rate movements by the Reserve Bank of Australia (RBA), could be a solution.
However, Mr Hyman said that tracker mortgages could be problematic as different banks have different funding costs and obtain funding through different sources – highlighting that the major banks fund loans mainly through deposits, while non-banks fund loans through the wholesale markets.
BID sets higher bar than responsible lending laws
During his appearance before the committee, Mr Hyman was also asked by Liberal MP and member for Mackellar Jason Falinski about his views on the proposal to scrap responsible lending obligations (RLOs) from the NCCP (with debate still pending).
Mr Hyman noted in his response that the bar established by RLOs is that the home loan product recommended by the broker is “not unsuitable” for the customer. However, he explained that the best interests duty (BID) has established a much higher benchmark for brokers already.
“[BID] has obligations that you must follow around comparing a number of products and, ultimately, as you go through that process, making sure that the recommendations that is made is in the best interests of the customer, which is a much, much higher bar than ‘not unsuitable’,” he said.
“So, we were reasonably satisfied when the proposal came out from the Treasurer, that any repeal in the RLOs would not lead to poor outcomes, because the bar would be higher.”
Mr Hyman said the rhetoric around the repeal of the RLOs on some sides of politics has centred on the fact that it is about “irresponsible lending”.
“I think that rhetoric is somewhat irresponsible, so to speak,” he said.
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