Why the RBA will struggle to rein in housing activity

It’s not going to be easy for the Reserve Bank to curb housing activity because about a quarter of the new loans come from well-rewarded brokers who will continue to push hard to get deals done.

And sometimes they will be tempted to dress mutton up as lamb as they sell the virtues of the home borrower to banks.

Not many people realise it, but there is an excellent commission to be had on most housing loans negotiated via a broker and the lure of those ‘semi-secret’ commissions will keep money pumping into the housing sector despite the Reserve Bank’s latest attempt to curb lending. 

If you are of my vintage, you will remember encyclopedia or life insurance sales people flogging encyclopedias and low-reward life policies because the commissions were high. These days, the same sorts of people often flog electricity because again, that’s where there are big commissions. 

Until recently, selling financial plans for high commissions based on assets and then a trail commission paid each year was at the winning end of the commission stakes. Sometimes those commissions were justified but more often they were not.

Thanks to people such as Alan Kohler and the introduction of new regulations, it is now much harder to reap big rewards from financial planning. And so housing loans are fast becoming the linchpin of many financial planners. Housing loans will be an important part of the new revenue model for groups such as AMP as they adjust to the lower commissions in financial planning.

If a broker introduces a mortgage to a bank, and does all the preliminary work, that broker normally receives a commission of around 0.6 to 0.7 per cent, plus a trail commission in the vicinity of 0.15 per cent, which sometimes rises if the borrower performs and stays with the loan. 

Given that we are dealing with large sums in home loans, these commissions can be very rewarding. AMP still has one of best person-to-person sales forces in the country -- it is one of its biggest assets. But the new commission structures make selling savings products, including superannuation, and financial plans much less rewarding.  

More and more AMP agents now start their client relationships by securing the home mortgage and, of course, AMP is also a banker. Once AMP agents have used their personalised selling to start with a home mortgage, then there is a commission base established that enables them to sell savings products on the lower commissions. I’m singling out AMP to underline the change that is taking place. There are lots of others doing the same thing and indeed Mortgage Choice and many broker businesses are based on these commissions.

When banks negotiate their own loans directly they do not pay the commission but in effect that extra margin pays for the cost of the branch and the personalised loan negotiation. In direct bank loans, the bank also gets a better chance to have a wider relationship with the customer and understand their real financial situation.

Given the lure of the commission structure banks will continue to be bombarded with loan applications, many of which will put the applicant in the best possible light (mutton dressed up as lamb) because the broker is doing the deal. If the Reserve Bank really wants to curb home lending excesses they will need to change the capital rules, and of course that is what the Murray inquiry is all about.