Coming soon the 'Best Interest' Test
If you followed the Banking Royal Commission and the subsequent media reporting you will have heard about a new "Best Interest Duty" that is being introduced for the broking industry.
Let's be clear on one thing though, for us what is in your best interest is also in our best interest as well; so while there is always the odd rogue (as there is in every industry unfortunately) most brokers already act in their clients best interest – if for no other reason than it is good for business.
What is best interest?
There are a number of variables in the equation that need to be considered and questions to be asked, some of these are:
- How long will the lender take to give an approval?
- Are the borrowers eligible for the lenders loan offer?
- What is the interest rate and other fees?
- Features and Benefits?
- Time for an approval
If you are under a tight timeframe to get an approval and settle is it in your best interest to send your application to a lender that is 0.5% cheaper, but will take 2 weeks to get an approval? No, certainly not. But suggesting a more expensive lender that can give you a decision in 24 or 48 hours makes sense; that's in your best interest.
On our lending panel we have a lender with great rates. But if you want to borrow more than 80% of the value of the property you need to pay Lenders Mortgage Insurance, which depending on your circumstances can be expensive. Lots of younger applicants obtain a guarantee from their parents to avoid this insurance cost – this lender does not offer loans with guarantors. Again, using a lender with a higher rate that does permit the guarantee and save the insurance may be in your best interest.
Interest rates and fees
Lots of lenders offer loan packages where you pay an annual fee in exchange for 'fee free banking' and a discount on the interest rate, but does this offer value for money? If for example your loan is small the interest saving may well be less than the annual fee. There are lots of financial institutions that offer free basic accounts so that's not a real consideration. In this case is the advertised lower rate with an annual fee in your best interest?
Features and benefits
Taking a basic loan that has limited features is usually cheaper than the loan with all the bells and whistles. A basic loan may not offer an offset facility but will still allow you to redraw any additional payments that you have made. This means that you need to 'park' your spare cash in your loan account and redraw it if you need the funds – same horse, different jockey? This is true with an owner occupied home loan, but an investment loan? If you pay money off the loan and then redraw it for personal purposes it may affect your tax deduction on the loan (disclaimer here, we're not accountants or tax advisers, this is a generalisation and you need to get your own professional advice). For an investor we may suggest a loan with a higher rate, but with the features that you need.
Getting a home loan is a little more complex than buying milk at the corner store. Get the milk wrong and you endure it for 3 days or so. Get the loan wrong and you may be enduring it for 30 years or so.
An experienced mortgage broker will guide you through all these points and much, much more. Challenge them and ask them why they are making the suggestions that they are – if their answer sounds fishy, or they can't answer effectively then there is something wrong. If their reasoning is rational and makes sense then guess what? The broker is probably acting in your best interest.
We don't really need legislation about this (but we're going to get it anyway). What we need to do is get rid of the minority rogues in the industry. Feel free to give Collins Hume's Lending Specialist David Seymour a call on 0417 785 747 to discuss.
David Seymour is a member of FBAA, a corporate member of MFAA and is an Authorised Credit Representative No 477331 of Regional Finance Solutions Pty Ltd ABN 71163893945 Australian Credit License 484980. He is also registered with ASIC, has professional indemnity insurance and is a member of Regional Finance Solutions' internal and external dispute resolution schemes. Phone David on 0418 785 747 or email email@example.com.