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The impact of Best Interest Duty on borrowers

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BID (Best Interest Duty) obligations are applicable only to mortgage brokers and not lenders or banks. Understand what this means for you as a borrower.

Recently enforced Best Interest Duty (BID) obligations that came into effect on January 1, 2021, have some very tangible positive benefits for borrowers. Here’s a quick look at what BID is and what it means for borrowers

What is BID?

BID is a mandatory requirement for all mortgage brokers that they are legally required to adhere to while providing customers with credit assistance. BID has two parts to it

  • Mortgage Brokers are legally required to act in their client best interests.
  • If there is a conflict of interest, the client’s interests are prioritised over those of the lender and broker.

Objective of BID

While the mortgage broking industry has always acted in the best interests on borrowers, from the government’s perspective BID aims at improving outcomes for the borrower by

  • Ensuring better alignment between Mortgage brokers and
  • Reducing the impact of potential conflicts on the quality of the credit assistance the borrower will receive

Take the first step

What does this mean for Borrowers? 

#1 Best Interests

While recommending a product, a mortgage broker must assess both cost and non-cost factors. Cost related factors include but are not limited to interest rate, fees, repayment amount, among other cost parameters. However, as most borrowers may already know, the loan cost is not the only aspect that must be considered while selecting a home loan. Non-cost factors like loan features and flexibility are equally important. In a lot of circumstances, the lowest price option may not be the best way forward for a borrower. For example, the lowest fixed rate loan without any features or the flexibility to make larger and more frequent repayments may leave the borrower financially worse off in the long run.

#2 Conflict

The broker must not recommend a product that benefits himself/herself and/or the lender but is not the best option for the borrower. Let’s say Home Loan ‘A’ offers a borrower a reasonable interest rate and features without any fees. Home Loan ‘B’ does the same but has a fee and a higher commission for the broker. In this case, recommending Home Loan ‘A’ is as per the ‘Conflict’ principle of BID as the broker is placing the borrower’s interests first.

While a mortgage broker needs to recommend and clearly explain the best option for the borrower, they can still assist with credit even if the borrower chooses to not go ahead with the recommendation.

How will your broker adhere to BID?

Your broker will follow the following step to adhere to BID

#1 Gather Relevant Information from you

  • Analysing your financial circumstances
    • Income
    • Living Expenses
    • Financial Commitments
  • Identifying your financial goals and aspirations

#2 Product Assessment

Your broker will scope the market for you to identify the best loan match as per earlier mentioned cost and non-cost loan features.

#3 Recommendation

Equipped with information on potential home loan matches that suit your individual needs, your broker will

  • Present you with product options
  • Explain the reasoning behind each recommendation
  • Educate you on all aspects of the loan to help you make an informed decision
  • Establish a process for regular communication
  • Begin the application process once you’ve made a choice

You now get an additional level of protection from your mortgage broker that you won’t get from banks or lenders as they are not bound by the new BID obligations!

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