Mortgage Choice under review as Royal Commission hits mortgage brokers

  • By Kate Weber

Morningstar has placed mortgage broker Mortgage Choice under review as the recommendations from the Royal Commission are expected to "damage" its business model.

A cut to the business’ fair value estimate is also likely.

Recently, the firm’s stock price is down more than 25 per cent following the release of the Royal Commission’s recommendations.

“In our view, the Royal Commission’s recommendations on mortgage broker remuneration, tougher licensing requirements and the requirement mortgage brokers act in the best interest of clients, damage the business model of Mortgage Choice,” Morningstar said in a client note.

Whilst the recommendation to end grandfather trail commissions in the mortgage sector was anticipated, there is concern this will shift the balance in favour of the bigger banks, jeopardising the viability of the sector.

“These policy recommendations are effectively a new multi-thousand-dollar tax on borrowing,” Mortgage and Finance Association of Australia Mike Felton said.

“They will put the broker channel at severe risk, damaging competition and access to credit and entrench bank power,” he said.

Morningstar said they think it’s likely the major banks will move ahead of the three-year phase out period and remove broker commissions sooner, further damaging the viability of the mortgage brokers.

The Treasurer stated from July 1, 2020, the government will ban trail commissions for new loans and limit upfront commissions to the amount drawn down not the loan approval amount.

It's understood the Senate has only five sitting days planned and the house of representatives only 10 days before mid-May meaning it will take months before a clear picture of how the government and regulators implement the recommendations.

The Morningstar also reported no major surprising come out of the Royal Commission and is a net positive for “Australia’s besieged major banks.”

The report revealed Westpac as their preferred bank and stated that the bank has faired better than their peers.

The report stated the lack of forced structural separation of the vertical integration model is a positive for Westpac and the bank is expected to continue registering relatively “clean financial results.”

The report also noted Westpac has not been referred to regulators for further misconduct and before the Royal Commission released the final report, Westpac’s share price was down 21 per cent in 2018.

Despite the 76 recommendations plus the uncertainty surrounding the removal of trail commission, the Morningstar stated the Royal Commission has done a good job in reducing the ripple effects to other areas of the economy and the government understands the need for balance.