Weighing up SA’s mortgage broker industry
Shaun Rademeyer, CEO Multinet
A mortgage broker is supposed to have the best interest of the client at heart when sourcing the best options in home loan finance available.
The Australian mortgage broking industry has come under close scrutiny following allegations that it’s partly to blame for Australian household debt levels being among the highest in the world. Local mortgage broker Multinet’s CEO Shaun Rademeyer explains what the South African home loan industry does differently to keep their client’s best interests a priority.
Being only introduced to South Africa at the turn of the century, mortgage brokers or bond originators (also called home loan officials) currently aren’t regulated by legislation. However, following calls for government to better regulate the industry, as most home loans today are sourced through origination (by 2007 it was approximately 60%), mortgage brokers are now included in the Property Practitioners Bill which will be debated in Parliament on 4 December.
A mortgage broker is supposed to have the best interest of the client at heart when sourcing the best options in home loan finance available. Looking at what is being uncovered about the industry in Australia, it’s clear South Africa should take note to prevent the same happening here.
Smelling a rat Down Under
For the past decades there has been increasing concern Down Under over the high levels of personal debt in Australian households, with huge mortgage loans the biggest contributor in most cases. A banking probe last year revealed that loans written through mortgage brokers were, on average, bigger, took longer to repay and were more likely to suffer higher arrears rates.
At the beginning of this year the Australian government’s bank royal commission began a series of hearings which unveiled further proof that “something is rotten in Australia’s $1.6 trillion mortgage market” (The Sydney Morning Herald). In September the commission released an interim report which was especially critical of the ‘perverse incentives’ of the industry’s value and volume-based remuneration system.
In Australia most of the major mortgage brokers are owned by the big banks. Mortgage brokers get paid a commission based on the value of the loan they sold – the bigger the loan and the longer it takes to pay it off, the bigger their commission. Brokers can also earn bonuses for the amount or value of loans they write within a certain time period. Losing out all the way is ‘the best interest’ of the borrower – not even the law, in this case the consumer credit law, protects the borrower when it comes to home loan finance – in the case of home loans the broker need only satisfy themselves that it is ‘not unsuitable’.
We do things differently in South Africa
Commenting on how the South African home loan industry would compare, Multinet CEO Shaun Rademeyer, said he doesn’t believe South Africans are in danger of sharing the same fate.
“The local origination industry in South Africa works closely with their banking partners to ensure that both the consumer and banking industry benefits from mutually beneficial relationships. Consumers are afforded the ability to compare product offerings in the market whilst getting the best deal and our banking partners can outsource certain functionality to ensure efficiency for shareholder and internal stakeholders. More than half of South Africans make use of the specialized service the mortgage originators offer to the market and is most certainly the easiest way for consumers to get multiple offers from one source,” he explains.
Furthermore, Rademeyer says none of the banking partners have ownership in a mortgage originator in SA. He also says they do not prejudice any of the banking contracts one over another. Here’s how he says things work in South Africa.
Remuneration: Bond originators earn a set fee per bank based on the registered amount of the loan, and the bond consultant in the market working under the originators earn the same fee across all the major banking partners also based on the registered amount. This avoids the possible negative selection from the consultant and allows the consumer to truly get the best individual deal for them as there is no financial benefit for the consultant to choose one banking partner over another. The consumer always has the view of all offers made by the banking partners and commission rates do not direct the consumer to one product over another.
Regulation: The industry has been self-regulated under MORCSA (The Mortgage Origination Regulatory Council of South Africa) for the past several years, however going forward the industry will fall under the Property Practitioners Bill.
Code of good practice: Their code prescribes that the mortgage broker / originator cannot prejudice the borrower and only allows for the provision of factual information from all banking partners. This should prevent the broker from making any decisions that is in his financial interest and always what is best for the consumer, even in some cases referring the client to a competitor if they can offer a product better suited to the needs of the client.
Lower interest rates: Customers that use a mortgage originator normally obtains a better interest rate vs. going directly to their own bank. There are several reasons for this, one bank might be stronger in the self-employed market whilst the other is a building loans specialist, thus comparing the banks allows for the consumer to get the best offer on the table. Also, banks compete for the consumers business. Allowing the consumer to compare their own banks offering to other banking partners ensures they get the best deal, something that they would not be able to do if they go directly to their own bank.
Interested to read more? Click here to read ‘Mortgage Origination: Important Lessons for South Africa’, an academic study by Anthea P Amadi-Echendu and published in 2014.
What do you think? Have your concerns about the local home loan industry been answered? Email your comments to email@example.com.