WHY DEALING WITH A BROKER IS IN YOUR BEST INTEREST
For anyone who is looking to obtain Home Loan finance for a new purchase, refinance their existing loan or complete some renovations to their home, there is a choice to be made on who you engage to arrange the loan for you. Do you go directly to the financial institution to obtain the finance, or do you engage a broker to arrange this for you? Since the Royal Commission into the banking sector was completed a number of recommendations have been implemented by the government regulators to address misconduct within the banking and financial services industry. Once such recommendation was implemented on January 1st this year – Best Interest Duty.
BEST INTEREST DUTY ONLY APPLIES TO MORTGAGE BROKERS, NOT TO BANKS
Best Interest Duty (BID) creates the obligation for mortgage brokers to act in the best interests of consumers and, where there is a conflict, to prioritise consumers’ interests when providing credit assistance. The majority of mortgage brokers have always acted in their client’s best interest when providing advice, the introduction of BID now legislates it. However, what has now been created is a clear difference in obligation when dealing with a broker as opposed to dealing directly with your Bank. Mortgage Brokers must act in their client’s best interest, the Bank does not have this obligation.
This is because Mortgage Brokers have access to products and services from many providers, so understanding their client’s requirements and objectives in seeking advice is the basis for making a recommendation on a Home Loan. A Bank lender has one suite of products to offer, so they don’t have the same obligations as a broker and can act in their employer’s interests, not the interests of the customer.
It is another major reason to deal with a Mortgage Broker rather than going to a Bank directly. Mortgage Brokers have a legal obligation to act in their client’s best interests, providing them with comfort that the recommendation the broker has made is the most suitable to meet their requirements and objectives.
HOW DOES A BROKER APPLY BID WHEN RECOMMENDING A PRODUCT
There are a number of factors which may determine what product a broker will recommend to their clients as the most suitable to meet their particular circumstances, while acting in their best interests.
- Price – this will always be a major factor in recommending a product to a client, however is not the only factor. Price includes the interest rate, any Establishment and on-going fees, and mortgage insurance costs if applicable. Recommending the cheapest product on the market may not be in the clients best interest as their circumstances may not meet the policy of the lender. Every client’s requirements are different.
- Credit Policy – does the proposed transaction meet the policy of the lender? Lenders all have different criteria when considering a finance application, so the broker needs to be aware of each policy to ensure they do not recommend an unsuitable loan.
- Response Times – is the transaction time-sensitive? Will the lender be able to approve and fund the loan in the time required by the client? This needs to be considered to ensure the broker acts in the clients best interest.
- Product Features – does the product have the features the client may require? Features like 100% offset, a secure rate, redraw.
- Conflict of Priority Rule – any conflicts of interest between the client and broker must be satisfied in the client’s favour. So when considering the best product to recommend the BID legislation states ”the conflict priority rule means that you must not recommend a product or service of a related party that would create extra revenue for yourself, your credit licensee or another related party, unless doing so would also be in the consumer’s best interests”.
In practice, if a broker has two products that would benefit their client, however lender A has an annual fee and offers the broker a higher commission payment, the broker must recommend lender B, even though lender A is still a great fit for their client. This satisfies the conflict priority rule.
Brokers must exercise judgement in the relevance of these factors when making reference to the client’s individual circumstances. So in satisfying BID the client can rest assured that their broker has spent a significant amount of time ensuring the product recommended is the most suitable and best to fit their requirements and objectives.
As a mortgage broker we act in your best interests. A lender has no obligation to do so. At SHL Finance we have always acted in our clients’ best interest and would love the opportunity to help you too. Please call Reece Droscher on 0478 021 757 should you want to discuss your finance requirements.