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Indeed rising interest rates and the cost-of-living challenges have seen refinances ramp up this year as banks attempt to sweeten the deal by offering new clients cashback offers and other incentives.
Earlier data from the Finance Brokers Association of Australia (FBAA) between 2018–21 found lender cashback incentives had risen by 59.1 per cent, which it said had been escalating recently.
The association highlighted that brokers were increasingly finding themselves exposed to clawbacks, given the ongoing cashback offers being handed out by lenders at the moment, in some cases up to $6,000.
Broker Donna-Marie Colgan at DMC Capital said it was an “extremely challenging environment” right now for brokers.
“I can write a loan for a client and then within six months I am being asked to refinance the loan due to the client hearing of a significant cash back and/or are seeing rates advertised far lower,” Ms Colgan said.
“I have no choice but to refinance the loan or I will lose the client (and get the clawback anyway).
“I am basically working for free if this happens within two years and it’s killing me!
“I don’t have a fee for service, I don’t charge my clients whatsoever — and I don’t know of another business where it would be OK (in anyone’s eyes) to operate under a business model where … if the client decides to sell or refinance within two years, you have to give every cent you earned back.”
Ms Colgan explained the seven consecutive rate rises had resulted in “panicked clients” looking to switch.
“I am a free resource if I don’t change my own model. Lucky I love what I do!” Ms Colgan said.
While broker Peter Tersteeg at Sage Lending can “appreciate the various reasons lenders have clawbacks”, he added banks lose their agency by offering cashbacks.
“The rule is simple. A lender offering cashback incentives to borrowers of any kind forgoes the right to charge clawbacks to brokers,” Mr Tersteeg said.
“Clawbacks were created to discourage churn by brokers. At the same time lenders are offering cashback offers which encourage churn — the two are contradictory.
“There’s even a reasonable argument that brokers’ clawback is covering much of the cost of the cashback.”
While lenders make the argument that cashback offers cover the cost of refinancing, he argued refinancing usually costs about $700–$1,000, while cashback offers range between $2,000–$6,000.
“Lenders have obviously done the research to know that borrower apathy on expensive loans will outweigh the costs of the cashback offer overall,” Mr Tersteeg said.
“A fairer and more honest approach would be for lenders to only offer cashback on the actual cost of moving lenders. This removes the cost barrier to people switching lenders.”
Mr Tersteeg said it would be great to see lenders compete on product features and pricing instead of “bribing customers into loans”.
Clawbacks under microscope
The Assistant Treasurer Stephen Jones MP has reiterated the government’s commitment to the issue.
“I understand that it takes a lot of effort, a lot of work, a lot of hours in establishing a loan. And if one of your clients moves their mortgage from one bank to another within two years, the bank is automatically clawing back — sometimes the majority of a commission payment,” Mr Jones said.
“That means mortgage brokers bear the cost.
“I’m interested in whether the money that has been clawbacked is greater than the bank’s cost in establishing the loan in the first place.”
The FBAA found that the average annual clawback value per annum to a broker had surged by 47.4 per cent over three years, from $10,229 in 2018 to $15,077 in 2021, putting pressure on the government to act.
Broker Gary Eckel at CommRural Lending said clawback was originally introduced to discourage “loan churn” not one-off unfair situations.
Mr Eckel had arranged a $2 million commercial loan for a client, who passed away within 12 months of the deal, which resulted in selling the security and paying out the lender.
“We spent a lot of time and effort to arrange the loan and the Bank clawed back 100 per cent of the commission … charged an application fee of 0.5 per cent as well as normal ongoing admin charges. We ended up with nothing,” Mr Eckel said.
“We did the whole transaction just for practice. Surely that is unfair.
“People go through marriage breakups, etc, and loans are paid out. Lots of reasons beyond our control. How does that become our problem? Why should we be penalised?”
Mortgage World broker Gary Willmot was pleased to see the clawback and cashback schemes “under the microscope” by the federal government.
“Clawback is totally abhorrent and entirely unfair to fair minded brokers … it’s time, after so long, to push the banks on this,” Mr Willmot said.
“They are only dragging the chain now, as it is good value for them.”
Rate degeneration and conflicting pricing models
Meanwhile, broker Elizabeth Wilson added other issues need to be addressed such as rate degeneration and conflicting pricing models for new or old business.
“New to bank and existing client rates should be consistent for one, luring in new business with better pricing than the bank book creates disloyalty in client bases,” Ms Wilson said.
“The recurring inability to reprice when the loan is too young, forces our hand to re-write the business for free or suffer a 100 per cent clawback on the loan.
“In some lenders the retention team then gets activated after all the hard work is done.”
She added that some lenders use a retention team after all the “hard work” of the broker is done, which diminishes the relationship with the lender and the clients’ respect towards the broker.
“Ownership of the client relations should remain with brokers if they introduce the business,” Ms Wilson said.
“The situation is destroying trust in what should be synchronous commercial interests to retain the client.”
[Related: Assistant Treasurer keen to know if banks profit clawback]
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