What Is The Best Interests Duty For Mortgage Brokers?

The Best Interests Duty is a legal requirement for mortgage brokers to act solely in your best interests, not the lenders’ when recommending a home loan. It came to effect on 1 January 2021.

Before this law, there was no legal framework ensuring brokers put borrowers’ needs first. Now, all licensed mortgage brokers in Australia must comply with this duty.

In practice, the Best Interests Duty means:

• Prioritising Your Needs: Brokers must focus on your financial goals, such as minimising loan costs, meeting repayment schedules, or accessing specific features like offset accounts.
• Avoiding Conflicts of Interest: If a broker stands to benefit from recommending a specific loan (e.g., through commissions), they must disclose this and ensure it doesn’t influence their advice.
• Providing Clear Justifications: Brokers must explain why their recommendations are in your best interest, ensuring you can make an informed decision.

This reform aims to align mortgage brokers’ practices with consumer expectations, ensuring you get honest, unbiased advice at every stage.

To learn more about the guidelines that govern the Best Interests Duty, you can refer to the official Regulatory Guide 273.

How The Best Interests Duty Works In Practice

ASIC has released the draft guidance which centres around the common steps in the processes used by mortgage brokers. It suggests the following:

1. Understanding Your Situation

Your broker’s first responsibility is to understand your financial needs and goals. They will ask questions to get a complete picture of:

• Your income, expenses, and savings.
• How much you can afford to borrow and repay.
• What kind of loan features you value, like low interest rates, offset accounts, or flexible repayments.
• Your future plans, such as buying an investment property or upgrading your home.

If your information is unclear or incomplete, they are required to ask more questions to ensure they fully understand your situation before making any recommendations. Without this detailed information, they cannot suggest the right loan for you.

2. Finding the Right Loan for You

Once the broker understands your needs, they’ll assess different loan options to find the ones that are in your best interests. This includes looking at:

• Cost: They’ll prioritize loans with competitive interest rates, low fees, and manageable repayment terms.
• Features: They’ll consider things like offset accounts, redraw facilities, or fixed vs. variable rates based on your preferences.
• Approval Timelines: If you’re on a tight deadline, they’ll look for lenders known for quick approvals.

The broker will compare loans from multiple lenders on their panel and match their recommendations to your unique circumstances.

3. Explaining Their Recommendations

When your broker presents their loan recommendations, they must explain them in detail so you can make an informed decision. This includes:

• Why the loan is suitable for your situation.
• How it compares to other options in terms of cost, flexibility, and features.
• Any potential risks or trade-offs involved in choosing one option over another.

For example, if one loan has a slightly higher interest rate but includes an offset account that could save you more money in the long term, they’ll explain why that option might be better for you. Their job is to help you understand the pros and cons of each choice so you can make a confident decision.

4. Conflict Priority Rule

The conflict priority rule is an additional requirement in the new best interests obligation, which requires mortgage brokers to resolve conflicts of interests in the consumer’s favour.

According to the draft guidance, “The conflict priority rule means that you must not recommend a product or service of a related party that would create extra revenue for yourself, your credit licensee or another related party, unless doing so would also be in the consumer’s best interests”.

More importantly, if there’s a conflict of interest, and the broker is unable to prioritise the consumer’s interests, then the broker must not provide the credit assistance.

Scenario: Aligning interests

A customer approaches a mortgage broker for a home loan. Based on the information provided, the broker concludes that ‘Home Loan – Product A’ with an offset account and no annual fees is the best home loan for the customer. The second best is ‘Home Loan – Product B’, which is similar but has a $200 annual fee. ‘Home Loan Product A’ which the broker thinks is best for the customer also gives the broker a higher commission on the same loan amount.

In prioritising the consumer’s interests, it is possible that the interests of the consumer and the broker will align. In this situation, the fact that there is a benefit for the broker does not indicate that the broker did not prioritise the customers’ interests.

However, if the situation was reversed, and the credit provider charging the annual the fee (Product B) paid the broker a higher commission, recommending the higher fee product would be inconsistent with the conflict priority rule.

5. Handling Special Requests

Sometimes, you might prefer certain loan features that are not necessarily in your best interests. For example:

• You may want an interest-only loan to reduce your initial repayments, even though it could cost more in the long run.
• You might insist on a loan from a specific lender, even if better options are available.

In these situations, your broker must explain the risks or downsides of your choice and suggest alternatives.

6. Keeping Detailed Records

Behind the scenes, your broker is required to keep detailed records of their process. This includes:

• The information they gathered about your financial situation and goals.
• The loans they compared and why they recommended certain options.
• Any discussions about conflicts of interest or special requests.

These records provide proof that they acted in your best interests and help ensure transparency in case there are any questions about their recommendations later on.

Why Is The Best Interest Duty Important For Borrowers?

Here’s how we can recommend the best home loan based on your situation.

We’ll first conduct a Preliminary Credit Assessment wherein; we look at your financial situation; and your objectives and product requirements for seeking credit.

Finally, based on our discussions and the lenders you qualify with, we’ll make our recommendations that best match your needs and requirements. Please be aware that it is not always possible to recommend a product that satisfies all of your objectives; the product selected will be the closest match to your requirements.

As a mortgage broker, we act in your best interests when recommending a home loan, whereas a lender has no legal obligation to do so.

Please enquire with us today by calling us on 1300 889 743 or by filling out our free online assessment form to speak with one of our specialist mortgage brokers.

Need The Best Home Loan For You?

Here’s how we can recommend the best home loan based on your situation.

We’ll first conduct a Preliminary Credit Assessment wherein; we look at your financial situation; and your objectives and product requirements for seeking credit.

Finally, based on our discussions and the lenders you qualify with, we’ll make our recommendations that best match your needs and requirements. Please be aware that it is not always possible to recommend a product that satisfies all of your objectives; the product selected will be the closest match to your requirements.

As a mortgage broker, we act in your best interests when recommending a home loan, whereas a lender has no legal obligation to do so.

Please enquire with us today by calling us on 1300 889 743 or by filling out our free online assessment form to speak with one of our specialist mortgage brokers.