While the financial services royal commission didn’t target the property sector as such, the recommendations laid out in the report are set to have a big impact on how we interact with it.
Australia’s big lenders have faced enormous shareholder losses during the proceedings, but according to Anna Porter, principal of suburbanite, it’s the regular home buyers that are going to be negatively impacted.
“The banks will still lend money because that’s how they survive. They just need to learn how to play by the new rules,” Porter told Your Money Live.
Among the key recommendations in the report are changes to the way mortgage brokers and financial planners are able to run their business and earn income.
That includes the removal of mortgage broker trailing commissions from July 2020, which allow brokers to be paid an ongoing commission by lenders for years, and the abolition of add-on financial products, such as insurance and superannuation.
“If it’s changing fundamentally how they do their job, it will change fundamentally how we interact with property,” she explained.
“The reality is that financial planners and mortgage brokers are going to start leaving industry, have actually already started to leave it.”
With trail commissions removed, borrowers will be expected to pay an upfront fee to brokers for the advice service they offer to get them the home loan.
But Porter believes the drop in the number of mortgage brokers and financial planners in the industry will make it harder and more expensive for borrowers to get good advice about their mortgage.
“Everyday mums and dads that wouldn’t know how to structure up their home loan, or how to look after their super fund, they’re not going to get that advice anymore,” said Porter. “They’re not going to want to pay for that advice.”
“The wealthy people that can do fee for service advice… and aren’t scared to pay for the advice to get a great financial planner, especially if there’s going to be limited planners left and limited brokers left, they’ll still have them on their team.”
“I think the rich are going to get richer and everyday mums and dads are going to be worse off from this.”
One of recommendations in the report is the abolition of heavy-handed sales tactics such as the hawking of insurance or superannuation products by financial planners and brokers.
That combined with a cap on insurance commissions for add-on products would go hand in hand to stop the kind of aggressive tactics the insurance public hearing heard.
But Porter believes this could result in less people being covered by life and trauma insurance, which she says is one of the main reasons people fall behind on mortgage repayments.
“When trauma occurs… that puts financial stress on a family. What fixes that situation is great life and trauma insurance. What makes that financial situation worse is lack of insurance. And that has a direct impact on the asset. It has a direct asset on whether the family has sell quickly or can hold the property,” Porter explained.
“With the potential for this to be underinsuring families in Australia, that is going to have a big impact on the property market. That is going to be the one where I see the outcome.”
Watch the full discussion in the video above.