Many home loan middlemen are keen to help you choose. We investigate.
There’s a new finger in the pie. He is the mortgage broker,
what you might call a loan ranger. In recent months more than
one mortgage broking business has suddenly appeared, bringing
a new dimension to home loan business in South Africa. Until now
estate agents have usually played the part of middlemen between
banks and the general public. Unless the buyer has insisted on
using his own bank, the agent will introduce him to a bank of
his own choice and receive a nominal 0.5% commission for his influence.
The practice has always been regarded as eminently fair as the
commission has been lawfully earned and virtually any bank will
pay it to him, ruling out price-war competitiveness or forced
The Loan Ranger - the New Middleman
Is there really a need for another middleman? Has the role of
the individual estate agent come to an end? It all depends on
how mortgage broking will actually be conducted. There could be
great benefits if the practice results in new home buyers having
a direct link to all banks through brokers acting principally
interests of the individual as happens in countries like the United
Kingdom and Australia. There established businesses advertise
directly to the public, offering them the service of a wide knowledge
of each particular bank’s products. The client has a freedom of
choice after being advised of the various options to decide which
product and bank to eventually utilize. Laws have been passed
ensuring transparency in each broking business including an obligation
to always disclose the financial benefit the broker expects to
receive. In short,
all mortgage brokers in the United States and these other countries
are accountable at law to the public for their activities.
We are seeing the beginning of what is likely to become a permanent
feature of local home loan business practice. Already, however,
there are signs that government intervention may be necessary
if local mortgage broking is to become the healthy institution
it is elsewhere in the world. Similar laws will have to be passed
to regulate the conduct of brokers to prevent unhealthy elements
creeping in which are not going to be in the interests of the
Features of New South African Mortgage Broking
The new brokers operating locally belong to two different types.
The first follows the universal practice of public advertising
seeking to canvass potential clients directly for their bond business.
You can find their services easily on the Internet and they are
very clearly projected. Potential customers are encouraged to
enter into a deal with the broking agency which places very few
restrictions on them. The actual agreements read more like an
information chart of how they work rather than a contract binding
the client to their services. In fact no commitment comes until
the client agrees to the terms and conditions of the financial
institution granting him the loan. The broker undertakes to obtain
offers from each of its participating banks within 48 hours and,
once the client has accepted one of them, it will arrange a meeting
with the relevant staff of the
bank to process the loan application.
If they follow the universal practice these brokers will disclose
their financial reward for their services, namely 0.35% of the
total amount of the loan finally granted. They should not restrict
their clients from canvassing other banks at the same time. Are
there any drawbacks? The obvious weakness is if your mortgage
application is only restricted to a few banks. As a client, you
should insist that all banks receive your loan application-or
be given the reasons why some are excluded.
Forced Marketing - the Other Type of Mortgage Broking
Then there is the second type - mortgage brokers intervening between
banks and estate agencies to ensure business is directed to banks
of their choice. Here, however, the involvement is not as transparent
as it should be. These new loan rangers generally transact their
business without visibility to the buyer who may be totally unaware
of their presence or interest. They do not generally advertise
to the public at large but conclude private deals on their own
terms. They canvass principals of large estate agencies, negotiating
deals whereby all the agency’s business is to go to them and through
their influence to specific banks. Here the home loan application
will not necessarily be directed to the bank offering the best
product but the one prepared to pay the biggest bucks. Cases are
already known of banks being prepared to offer up - to 2.9% commission
to these mortgage brokers for bond business. That’s quite - a
whack! On a loan of R500 000,00 the bank will be prepared to pay
out no ‘- less than R14 500,00 for its A new business!
This practice is detrimental to good personal business relationships.
The fresh air of healthy A competitiveness gives I way to the
polluted atmosphere of forced marketing. Individual l agents working
for I these agencies are I deprived of any right to influence
the ultimate direction of the loan - application. Their recommendation
comes no longer from personal experience of the banks offering
the best products and after-sales service but from compulsion
to use the institutions offering the highest commission.
Which Bank - The One with the Best Product or Biggest Commission?
As you can see many agencies will, in future, be selling their
home loan influence to the highest bidders. You can be sure those
bidders may well be banks that cannot rely exclusively on the
quality of their service and products to net them their business.
You will do yourself a huge favour by asking your agent whether
his or her agency has an agreement with a mortgage broking agency
through which it earns substantial commissions for using specific
Today home loan consultants employed by banks are generally more
trained, visible and available than they were before. Services
and skills have been sharpened. Commission, however, is another
matter entirely. They spoil healthy competitiveness. Banks which
attract business through extravagant commission payments are forcing
the market against the more acceptable face of mortgage broking
- transparent dealings with the public where individuals have
complete freedom to consider a wide range of mortgage packages
with the broker earning a reasonable commission (up to 0.5%)
for his services.
The Estate Agents’ Code of Conduct
All estate agents are bound by the Code of Conduct issued by the
Estate Agency Affairs Board. In its October 1999 issue of its
regular publication “Agent” the Board has given a reminder to
all agencies of their responsibilities to the public in a short
article headed Mortgage Broking. Agents may not deliberately“steer”
buyers to financial institutions of their own choice through any
improper influence. No agent may recommend one bank’s products
or services over another purely to earn a commission. Payments
of commissions to agents in the traditional manner have again
been endorsed as perfectly fair. No obligation rests on the agent
to disclose to the buyer that he will be I remunerated for directing
bond business a certain way but no undue influence may be used
to achieve this end. The agent’s role, first and foremost, is
to offer advice on the best services available and to allow each
buyer plenty of room to compare the various packages offered by
the different banks.
Directing home loan applications to specific banks through mortgage
broking agencies purely because of a private deal guaranteeing
high commission payments would appear to be the very thing the
Code of Conduct defines as unprofessional conduct.
Clients, Customers and Professional Service
What can you do to avoid becoming a victim of forced marketing?
You will need to maintain a lookout for loan sharks lurking in
the shadows. By all means let your estate agent recommend a bank
but ask why the preference is suggested. In what way do the bank’s
products and service compare more favorably than those of other
banks, what experience has the agent had of other banks, how long
has the agent been in real estate to be able to speak with authority?
If you are willing to accept an agent’s recommendation, go to
the bank yourself, meet the loan consultant personally, and conduct
your business directly with the bank’s loan staff. Getting to
know them personally paves the way for a long-term harmonious
In an article headed Buyers suffer in battle for bonds (Sunday
Tribune Property Guide, 12 September 1999) the problem of exclusive
alliances between banks and estate agencies was highlighted. “Estate
agents who punt bonds from select banks only do home buyers a
disservice” writes the property editor James Brennan. The intervention
of mortgage brokers, operating beyond reach of the buying public,
only aggravates the problem. Keep a lookout for the professional
estate agents who will have your best interests at heart. Watch
out for the mercenary interests of others!
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