If you’re a property investor, you’ve no doubt been anxiously awaiting the report and recommendations from the Hayne Royal Commission into Misconduct in Banking, Superannuation and Financial Services.
The good news is that as property investors, we seem to have taken most of the hits already. From our point of view, it’s mostly upside for property investment.
The Hayne Royal Commission was instigated due to reports of widespread misconduct in the banking, superannuation and financial services industry. The transgressions ranged from the more extreme money laundering, terrorism financing and impropriety in foreign exchange trading, to the less dramatic but also potentially harmful offence of failing to accurately verify living expenses of home loan customers. This latter often led to loans that were unserviceable by the borrower and that exposed the bank to much higher risk.
CBA was rewarding brokers (through trailing commissions) for encouraging customers to enter into higher-value home loans and for overly long terms. NAB, possibly the bank that received the most approbation and scorn, admitted that employees in greater western Sydney were accepting bribes to pass loans when they knew that the documentation was false so they could meet lending targets and receive bonuses.
Not one of the Big 4 was exempt from criticism.
Some mortgage brokers were known to encourage people taking out home loans to increase the size of their loan so they could buy, for example, a new car.
The report: Key findings
As you’ve probably read, the Hayne report handed down 76 recommendations, 75 of which have been accepted in principle already by Treasurer Josh Frydenberg. The one recommendation that the Treasurer is reluctant to adopt relates to more stringent regulation of finance brokers.
The recommendations that are relevant to property investors include:
- Mortgage brokers must act in the best interests of borrowers.
- Mortgage broker commissions should be banned but the change would be phased in over two to three years.
- Borrowers, rather than lenders, should pay broker commissions.
- Mortgage brokers should be subject to the same laws that apply to financial advisers who give financial advice.
The report expressed a view that the advice mortgage brokers provide is similar to personal financial advice given by financial advisers. Therefore, mortgage brokers should be required to undergo the same level of training and disclosure. They’d be required to hold a university degree and provide Statements of Advice. These latter provisos are viewed with some alarm by the broking industry as a whole. They view the suggestions as unduly onerous and believe that, especially in regional areas, they would put some brokers out of business, divert business away from smaller lenders and reduce competition.
Implications of the Royal Commission for property investors
We see the mortgage broker shakeup as a bit of a red herring. Brokers and the broking industry are an easy target group. However, mortgage brokers write around 60% of all property loans. They have clout and they’ll fight for less regulation.
A key issue identified by Commissioner Haynes was the practice of trailing commissions. Mortgage brokers across the nation believe that the Commissioner has misunderstood trailing commissions.
As the system works currently, brokers receive 0.6 per cent of the loan value when the loan is approved, then a trailing commission of 0.2 per cent for the life of the loan. In effect, the trailing commission is a ‘maintenance fee’ that’s paid by the banks to brokers, who do what would ordinarily be the bank’s job of informing customers about interest rate changes, perform annual loan reviews and more. Given that the average length of a loan before it’s rolled over, switched to another loan or settled is seven years, it’s clear that customers take heed of their loan reviews. Brokers should be paid for performing this and other services.
The Federal Government has already called for breathing room on the broking industry recommendations, while Labor has pulled back from its initial support for recommended changes.
Overall, we believe the outlook for property investors is good.
1. Banks will not tighten lending further.
During the course of the Royal Commission, banks were scrabbling to improve their systems and avoid prosecution in anticipation of the final report. They re-examined their exposure to risky loans and improved their scrutiny of paperwork (in particular, living expenses of home loan applicants), a task they’d left previously to the mortgage brokers. As at 2019, the average consumer might qualify for a loan of around 20% less than they would have a year ago.
2. The lending landscape for property investment will offer more certainty.
Even with all the misdemeanours, we should be proud of our Australian banking system and financial services in general. However, public confidence was shaken when the various crimes were revealed. Once the changes in the final report are implemented, we can look forward to a more stable, resilient financial system that (hopefully) will help its customers as well as the bottom line.
3. Maintaining credit flows and competition are key government priorities.
While Peter White, managing director of Finance Brokers Association of Australia stated that the final report was, “a very … bad outcome that has the risk of huge unintended consequences for home loan borrowers”, and noted that “The big banks will be the big winners if brokers are forced out of the industry, and borrowers will pay more in costs and hidden fees …”, most property industry heads are confident that the recommendations on stricter regulation for the broking industry as a whole will either be very gradual or not be implemented at all.
As Ken Morrison, Chief Executive of the Property Council of Australia, noted:
“A strong, stable and well-functioning financial system is the lifeblood of our industry and the Australian economy,” while a strong property industry “delivers great places for Australians to live and work, provides jobs and drives economic growth, and helps Australians save for their future.”
Federal Treasurer Josh Frydenberg confirmed after the release of the final report that the government’s key priorities in their responses were to sustain credit flows and maintain competition.
4. Property fundamentals in Parramatta are sound
With momentum still building for government and private spending on infrastructure, housing, retail and cultural spaces, and solid growth prospects, investing in Parramatta is still a wise choice.
So if you’re a property investor, think like Warren Buffet: Be “Fearful when others are greedy and greedy when others are fearful.” If we can help you with investment properties in Parramatta, please give me or one of our team a call.