The Best Interest Duty for Mortgage Brokers Explained
What is The Best Interest Duty?
Based on recommendations from the Royal Commission and coming into effect from the 1st of January 2021, the Best Interest Duty is a statutory obligation for mortgage brokers to act in the best interest of their clients and to prioritise their interests when providing credit assistance.
That’s not to say that prior these guidelines coming into effect brokers were not acting in the best interests of their clients, it is just that now there is legal framework in place to clearly identify how brokers are required to conduct business.
What Does the Best Interest Duty mean for consumers?
As mortgage brokers are bound by the Best Interest Duty and obliged to act in your best interest, this is yet another compelling reason to engage the services of one. Being legally required to act in their clients’ best interest gives the applicant peace of mind that they are being served well, if indeed you needed further evidence that brokers are a sound avenue to secure a loan application.
The Best Interest Duty does not apply to banks.
Brokers are obliged to provide information across the lending market to aid you in choosing an appropriate product in line with your short, medium and long term goals. This means comparing products from a suite of lenders. Conversely, banks are only at liberty to sell you their products and therefore are acting in their own interests when they seek to sell you those products.
If a client approaches their bank for a new loan and the most suitable product they have available is not as cost effective as another institution, they are not bound to let that client know of the cheaper alternative. Brokers however are legally bound to do so.
How do Brokers Comply with Best Interest Duty?
The key steps mortgage brokers use to establish what is in the customer’s best interest:
- Information gathering: Brokers must inquire as to the consumer’s unique circumstance, objectives and financial situation, their goals and loan features they consider important.
- Individual assessment: Brokers will then consider available products that are relevant to the consumer and what is in line with their best interest.
- Presenting information and recommendations: The broker will then make recommendations reflective of the consumers goals and requirements that are in alignment with their circumstance. Present recommendations and information that is consistent with their best interests. Educate the consumer to make informed decisions about their potential loan product. Assist the consumer in appropriately applying for the credit facility they have chosen.
It’s unlikely you will see any drastic changes in the way you do business with your broker when you take out your next loan application. However, you may notice that more questions are asked, more documentation is requested and an average finance meeting is markedly longer than you previously experienced. But don’t misinterpret this as your broker trying to make your life difficult – on the contrary – it means they are acting in your best interest.