Changing face of the mortgage market

Mortgage broking as a service is a relatively new concept with the industry being in existence just 17 years. In that time, a lot has changed. Servicing consumers in the market for the purchase of real estate, mortgage brokers have filled a gap in the market that has been missing in the past. With fees and commissions paid by lenders whose loans they sell, brokers are perceived to provide unbiased advice to their customers.

Furthermore, because they represent a panel of lenders they are able to offer their customers a range of products and tailor their mortgage to their specific needs. For these reasons the Mortgage Broking industry has seen the demand for its services grow over the years with revenue expected to reach $1.44 billion by the end of 2010-11, employing close to 13,000 people across 6,930 establishments nationally.

Although the industry has been growing and is expected to continue to do so into the future, the collapse of the US subprime mortgage market, which triggered the global financial crisis, had detrimental effects on the industry’s performance in the past five years. The main setbacks for the industry came in the form of lower commission income and a fall in demand for housing finance. With lending institutions facing the rising cost of funds, they reduced the commissions paid to brokers. Similarly, rising unemployment and tightening of lending standards meant that the volume of loans brokered fell.

In the coming five years, the industry is expected to break free from the shackles of the global financial crisis, as demand for housing finance recovers and grows. Although tighter regulation of the industry will be enacted, competition will intensify with a number of lending institutions returning to the market following the reopening of securitisation markets.

This will see a greater demand for broking services arising as lenders continue to use brokers as a means of distributing their products. As a result, mortgage brokers are expected to claw back some of the ground made by banks in the home loan market, which currently originate around 90% of all mortgages issued. By June 30 in 2016, mortgage brokers are expected to originate up to 50% of mortgages nationally with a large portion being on behalf of banks. The rising level of competition is likely to lead to greater consolidation within the industry as participants look to achieve the cost reduction afforded through economies of scale.

Industry outlook

The Mortgage Brokers industry is expected to record stronger growth in the next five years as it shakes off the shackles of the financial crisis. Revenue is forecast to expand at an annualised rate of 4.9%, reaching $1.83 billion by the end of 2015-16. With it, the industry’s contribution to the economy is set to expand by an average rate of 5.1% over the next five years, helped by rising profitability and higher wages. Wages are expected to grow by 4.9% on an annualised basis as the industry continues to grow in terms of establishment numbers and the number of people it employs.

Establishments are expected to expand at a faster pace than enterprise numbers, reaching 8,050 by the end of 2015-16 financial year, while enterprises will grow to 5,810. This is an annualised growth of 0.5%, compared to 3.0% growth in establishments.

Although the financial crisis has seen the industry slowdown in recent years, the trend is not expected to continue. Over the next five years the Mortgage Brokers industry is expected to return to growth and prosper.

Industry performance: Key external drivers

10-Year Bond Rate

Interest rates affect the demand for mortgage products that participants in this industry broker. Thus as interest rates rise, there is less demand for mortgages because they become relatively more expensive, pricing some prospective customers out of the market. Resultantly, brokers see the level of business activity decline as demand falls.

Competition from substitutes

Participants in this industry broker loans on behalf of national and regional commercial banks as well as other lenders. If consumers opt to approach these lenders directly, bypassing the services offered by brokers, the industry loses revenue at their expense.

Household formation

With there being an undersupply of housing in Australia, as the number of households grows, the demand for housing loans rises. This generally translates into a larger number of loan applications being processed by mortgage brokers. Greater volume of loans brokered generates more fee and commission income for the industry.

Residential housing prices

House prices have two major, opposing effects on the Mortgage Broking industry. From the one perspective, as house prices rise any mortgages brokered will attract higher fee and commission income which tends to be charged as a percentage of the total loan amount borrowed. On the other hand, as house prices rise, some consumers will be priced out of the market as housing affordability drops. This means that the volume of broking activity will fall, translating into less revenue being generated. However, IBISWorld believes the overall effect of this driver to be positive.

National savings ratio

The amount of savings households have affects their ability to take out a mortgage. Thus, as households increase their savings, a greater proportion of them become eligible to access funding to finance the purchase of a home. Subsequently, the demand for broking services grows, translating into more revenue flowing through to the industry.

Key success factors:

• Having links with suppliers: It is important for brokers to have a strong relationship with lending institutions so as to be able to offer their clients a wider range of loan products.
• Having a good reputation: Receiving referrals from industry related organisations such as real estate agents and word of mouth from existing clients praising the services rendered helps grow brokers’ client base.
• Experienced work force: Experienced and knowledgeable staff involved in mortgage products is vital in providing superior level of customer service. It is also vital to effectively communicate different loan products to clients and to negotiate the best deal with lenders.
• Ability to franchise operations: Many larger, more successful brokers operate through a national network of franchisees. Additionally, with increased competition, many sole operators are also joining membership organisations in order to receive better training and operating techniques.
• Economies of scale: Many of the larger operators have a sizeable business model, allowing them to grow their originations and loan book without growing their cost base at the same rate.
• Maintenance of excellent customer relations: Mortgage brokers must aim to continually provide a high level of support and service to their customers. They must also provide strong support to their franchisees, in marketing, technology, training/professional development, legal and compliance.

Barriers to entry

In the absence of a national occupational licensing regime, there are minimal barriers to enter the industry. Currently, except in Western Australia, a person is not required to have training or educational qualifications to practise as a broker. There are also minimal capital requirements since brokers can easily operate without premises or overheads, without employees and without personal compensation insurance. Some brokers have run significant practices without ever meeting clients, operating solely through telephone and facsimile contact.

The industry is still in a growth stage with a rapidly growing demand for mortgage broking services. The increasing number of loan products that has become available to the public, combined with the increasing complexity of such products, has added to this growing demand. The search for a home loan is time consuming and the level of difficulty in differentiating and choosing a suitable product is high. Mortgage brokers assist clients in differentiating and comparing available products, recommending products that are tailored to their needs and assist them with the loan application process.

Major banks, and to a lesser extent regional banks, credit unions and building societies, utilise a considerable number of brokers, ranging from 15 to more than 500, suggesting that the greater the size of the lender’s broker-panel, the wider the distribution network. The number of mortgage brokers has not yet reached saturation point.

The ability to provide a wide range of products from a number of financial institutions is essential, but can be difficult to obtain. Mortgage brokers must possess the ability to build a network of referrals, such as with real estate agents, lawyers, accountants and banks. A panel of more than 20 lenders is average for the industry (although this average is increasing).

Generally there is no need for large office buildings and other capital equipment in order to establish a mortgage broking business. Brokers often operate on a mobile basis via the internet.

Robert Bryant is the general manager of business information firm IBISWorld.