Bank vs brokers

By PHILIP MACALISTER

You've probably seen one of the many advertisements the Bank of New Zealand has been running over the past week or so. The message is that now they have got rid of mortgage brokers, they can give you a much better deal on your home loan.

Before you race into town, it's worth looking into the motivation behind the ad and asking what brokers actually do. Are they value for money and what is the BNZ really trying to achieve?

Mortgage brokers are a young but growing industry in New Zealand. In human terms they are probably in early puberty, still a bit spotty, but maturing and keen.

In the United States, more than 70 per cent of all mortgages last year were processed through a mortgage broker. In New Zealand the figure was around 25 per cent.

So is the BNZ trying to buck the trend and are there any risks in this strategy?

Brokers' selling pitch to you is that their service is free. They save you time, complete the paperwork, find the best deal and it doesn't cost you a cent.

No, it's not unbelievable philanthropy. Brokers earn their crust through commissions paid by the lenders for all the business put their way.

In these days, where there's a charge for everything, and banks - the biggest provider of home loans - have a reputation for charging for every service they provide, claiming that anything is free is sure to provoke scepticism.

Technically the mortgage brokers' claim is true. When you use a broker, no money changes hands when you do a deal.

But there is some concern about the "free" claim. This was highlighted this year in broker magazine the New Zealand Mortgage Mag. In one corner of the ring was the Mortgage Brokers Association defending use of the word "free", and in the other was one of the larger broker chains, Mortgage Link, and the regulators.

Mortgage Link decided in February to ditch the claim that mortgage broking is free. Rather it pitches its service as one of providing professional mortgage advice, as opposed to flogging product.

Alongside it are the regulators. Internationally, regulators are paying far more attention to the commissions that financial organisations pay brokers and advisers to sell their products.

So now we have brokers claiming their service is free, while a bank says it can give you a cheaper loan because it doesn't have to pay brokerage.

Who is right? Brokers admit that it costs lenders to sell their mortgages through brokers, but they suggest the BNZ's claims are mischievous.

The brokers argue that while BNZ doesn't have to pay commissions to brokers, it still has to pay salaries, plus overheads such as office space, computers and cars.

Which is cheaper? It's hard to tell. However the difference does highlight the role of brokers. If you go to a bank, you will get a bank home loan whether it is the most suitable for you or not.

Brokers who belong to the Mortgage Brokers Association must have agency agreements with at least six lenders. The idea is that they can then say they can find the best, or most suitable, home loan to meet your needs. This access to a range of products is the real strength of the mortgage broking industry - not so much the "free" claim.

So why is the BNZ being so aggressive?

At this point it's worth recording a little history. The BNZ and brokers haven't got on for years. The bust-up came when the bank launched its Global Plus home loan product, offering FlyBuys points every time you pay off some of your loan. While Global Plus has undoubtedly funded many overseas trips, the bank never allowed brokers to sell the product. (The reasons have never been made clear but one could speculate that the cost of the FlyBuys probably made the loans unprofitable or close to it.)

Consequently, brokers understandably put very little business the bank's way.

Things came to a head a year ago (not last week, as reported in some places) when the BNZ publicly announced that it was no longer going to deal with mortgage brokers.

In the past month the BNZ has adopted what is considered a highly aggressive strategy, first cutting its two and three-year fixed home loan rates to levels way below the market and in the past fortnight launching its anti-broker campaign.

So is the BNZ offering the best rate?

A search of rates on the GoodReturns website (www.goodreturns.co.nz) shows that, yes, the BNZ does have some of the cheapest two and three-year rates in the market and that it was the organisation which forced everyone else down.

A month ago when the cuts started, there were economic reasons to lower rates.

Longer-term rates are particularly influenced by what is happening in the US economy, and back then there was some uncertainty about how strong that was. However, a slew of good economic news from the US has since pushed up fixed-interest yields rapidly, forcing an abrupt u-turn from local lenders.

In the past two weeks longer-term fixed rates have risen across the board with some going up more than 0.25 percentage points.

The other factor is competitive pressure. The home loan market tends to be sheep-like - when one cuts the others follow.

Plus, as one non-bank lender commented, banks like using the "bait and trap" method of capturing new business. The classic bait is to offer a seemingly irresistible short-term rate to attract customers and then, when they refinance in, say, six months, charging them much more for a longer-term loan.

This competitive pressure is, perhaps, most clearly illustrated by the comments from some of the bank economists who described the recent two and three-year rates as "absolute bargains".

BNZ economist Tony Alexander more recently admitted in his weekly economic overview that margins on these products were extremely tight.

The inference was that rates had been driven down by competitive pressures (led by the BNZ) as well as by economic factors.

The interesting thing is that while the BNZ is the noisiest, it isn't alone at the low end of the market.

HSBC has been aggressively competing and has even launched a campaign aimed at brokers, promising: "We won't cut you out."

Most mortgage brokers don't seem too concerned about the BNZ's campaign. Mortgage Brokers Association president Brian Berry calls it a backhanded compliment.

Berry suggests the BNZ's aggressive advertisements indicate it is suffering from not dealing with brokers. "They must believe the broker market is hurting the bank and they're trying to counter the impact. If brokers are getting 30 per cent, obviously they're missing out on that."

It is understood that brokers account for about one-third of all mortgage sales, and that brokers put most of their business through banks.

However, because of the GlobalPlus issue, BNZ never had a representative share of the broker business.

The broking firm which is most concerned about the issue appears to be Mike Pero Mortgages, which launched its $7 million float this week, offering shares in the business to the public.

Pero says the BNZ campaign, which is running on television, in print and on the internet, is designed to undermine the listing of the country's biggest brokerage.

"The timing of the BNZ advertising and PR campaign seems to be a very cynical smear campaign and attempt to undermine Mike Pero Mortgages' share offering."

But back to the big question for anyone looking for a loan: is the BNZ offer a good deal? Well, it is one of the best offers in the market at the moment and it won't last forever. However there are other lenders in or around the BNZ level too.

But, if you believe research from Massey University, the debate over rates may be a little meaningless.

Research done several years ago showed that the rate wasn't the most important factor for brokers. The biggest one was service. When you consider that many lenders have very similar rates, this makes sense. Remember: get the service you deserve, and you only get that by being selective.

* Philip Macalister is the editor of online personal finance magazine GoodReturns.

* Email Philip Macalister