It looks like younger borrowers use mortgage brokers much more than baby boomers and this may contribute to them taking on more debt than they can comfortably service.
More than two out of five borrowers aged between 28 and 42 used a mortgage broker to obtain their current home loan, according to a Roy Morgan survey of 5634 respondents who bought a residential property in the past five years.
Over a quarter of baby boomers aged between 58 and 72, used a mortgage broker with the majority going directly to the lender.
The reason? Younger people have grown up with mortgage brokers and see them as an easy option to find a home loan. This applies particularly to first-home buyers as brokers are able to navigate the complexity of the loan market and help them work through the tedious application process.
Another reason is that mortgage brokers are more adept in finding a lender who will allow younger people to borrow the most as they struggle to get on the property ladder, according to a report in the Sydney Morning Herald.
The Australian Securities and Investments Commission has warned that
“a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment,” ASIC said.
The banking commission has recently highlighted some of the questionable ways in which mortgage brokers are paid.
Even though it is the bank, not the homeowner, who pays the commissions to the broker, the conflict of interest is that the broker gets paid more in commission if the home buyers borrow more.
Besides the upfront commission paid when the loan is set up, the broker also gets ongoing commission as long as the borrower has the loan.
The fallout from the banking commission and Australian Prudential Regulation Authority’s stricter lending policies has already seen Sydney and Melbourne property markets hit hardest says property analytics company, CoreLogic. Housing values across both cities have recorded an annual decline – down 0.3 per cent – for the first time since November 2012, the company said in its April report.
The biggest contributors to this decline were Sydney and Melbourne, falling 0.4 per cent each.
With falling prices and values in both capital cities, this will pose a worry especially for investors who favour interest-only loans.
Investors usually look to borrow the maximum amount so that tax deductions on the interest are maximised.
They are also speculating there will be sufficient capital gains on the property to eventually pay back the loans as well as cover the significant costs of property investing, with some profit left over.
Interest-only mortgages typically revert to standard mortgages after five years. This means they will face higher minimum repayments which may pose an additional burden especially if their household finance is already stretched.
With falling prices and higher repayments, investors who bought at the top of the market, risk falling into negative equity – in other words where the house is worth less than the mortgage.