High levels of switching between home loan providers has the potential to create bills for the borrower — and their mortgage adviser, brokers are warning.
There has been a steady increase in switching this year. Almost $2.5 billion of lending changed to a new provider in June, up from $1.4b last June and $1.2b the year before.
Some of that has been driven by an increase in competition with “cash back” offers, which give up to about 0.8% of a home loan’s value as an incentive to change to a new bank.
But, if the borrower does not then stick with the new lender for at least as few years, it could come with a cost for them. And if they had not been with the lender they switched from long, it could also cost their adviser, who might send them a bill.
Most banks “claw back” some of what they paid a mortgage adviser if the borrower moves to a new bank or other lender within about two-and-a-half years.
They also ask borrowers to repay some or all of the cash back they received as an incentive to move to the bank, for sometimes out to four years.
The Commerce Commission recommended that home loan providers should claw back both the commission and cash back offers on a pro rated basis.
Advisers say there are many different ways that it is calculated.
One major bank has moved to a straight line claw back over 24 months, so that if someone switched banks after nine months, 15 months’ worth of cash back or commission would be clawed back.
David Cunningham, chief executive at Squirrel, said other banks had rules such as 100% claw back in the first six months, 75% up to a year, 50% for 13 to 18 months and 25% claw back out to 24 months.
Others clawed back 100% in the first 15 months and 50% out to 26 months.
“Each bank is a little different,” he said.
Sometimes, when brokers have had their commission clawed back by a lender because a client had switched, they sought to recover it from the customer.
Glen McLeod, head of Link Advisory, said they were not usually able to claim the whole amount.
“We’re only allowed to charge a service fee at that particular time which is the maximum of 10 hours at $300 an hour. So, if I was clawed back a $5000 commission, I have to be able to show that I and my team have completed more than 10 hours work in order to be able to charge $3000 for the work we’ve done.”
He said it was reasonable for advisers to expect to be paid for the service they provided.
“The situation now is that there’s such an encouragement at refix time to refinance. That’s not coming from advisers, that’s fully led by cashbacks and people going ‘well I’ve got a $2m mortgage, so that’s $18,000 cashback’ – it’s hard to argue with $18,000 as an incentive to move… people are hurting out there, a $6000 cheque or even $4000 is a lot of money for people.”
He said his clients shifting generally did not incur a claw back because they had been with the lender long enough.
“But I dare say there would be a few that are getting claw backs out there at the present time… and the clients too, if they’ve taken cash back before, you might get $6000 but if you’ve got to pay back $4000… You’ve got to talk about the facts and go through what are the financial benefits of your moving, what are the financial risks?”
He said advisers would outline their fee structure and terms in the documentation they gave to clients.
Some advisers also charged a fee if they helped a client with an approval and the client chose not to go ahead with it.
“It might be a situation where the client has had a change of circumstances, maybe they’ve got an application in with us and we’re all good to go then they lose a job. That’s outside the client’s control and so I’d be going I feel for you. Don’t worry about it,” McLeod said.
Financial Services Complaints Ltd said it would receive about 12 to 15 complaints a year about mortgage advisers seeking to recover clawed back commission.
“A few years ago, we developed a consumer guide to help explain what claw back fees or fees for service are, and why advisers may charge them in certain situations. We believe that this has helped improve understanding and contributed to a noticeable drop in complaints.”
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