Mortgage brokers have enjoyed a phenomenal rise since the 1990s and now dominate how most Australians borrow money for buying property. About 75 per cent of new mortgage lending happens through brokers today, up from 56 per cent in 2019.
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Given brokers are this prevalent, the banks have no option but to deal closely with them, but from the perspective of big four bank investors, it comes at the cost of profits. That’s because banks pay brokers up-front and ongoing commission for every loan they arrange, which makes these loans less profitable than those written by a bank employee.
Banks largely have themselves to blame for the situation. By closing branches and using brokers, banks effectively outsourced their sales and allowed another party, the brokers, to get closer to their customers. In finance jargon, the banks allowed themselves to be “disintermediated” while the product they are selling became “commoditised”.
This is one reason why the banks’ retail banking divisions, which once delivered rivers of gold, have in most cases been making less money lately.
Importantly, customers don’t see this as a problem. The majority of people seem to prefer dealing with a broker who is not aligned to a particular bank, and who can give them a range of home loan options. By bringing more transparency to the mortgage market, brokers have helped to boost competition, which is good news for consumers.
There’s also one large bank that’s taking a very different approach to its peers, and that’s Macquarie. The “Millionaires’ factory” relies almost entirely on mortgage brokers to write its loans, as it doesn’t have branches. This strategy, alongside technology that allows Macquarie to give customers a speedy decision on approving the loan, has delivered Macquarie rapid growth.
Morningstar’s Nathan Zaia says Macquarie has grown 4.4 times faster than the market in the past quarter, and if it keeps this growth up, its mortgage book will almost double in five years.
But among the big four lenders, there is now a clear attempt to push back against the rising tide of brokers. So, will banks succeed in trying to convince more people to take out a loan directly, rather than through a broker?
Commonwealth Bank has had success on this front, and it looks as though its rivals are trying to copy its strategy (which is understandable, given CBA’s massive retail banking unit is seen as a money-making machine). CBA’s latest results showed it kept the share of proprietary loans steady at 54 per cent, which is a much higher share than its rivals.
CBA has had success in its push for more proprietary lending, and others appear to have copied it.Credit: Oscar Colman
But bank-watchers think turning back the rising tide of broker-arranged loans will be tough for Westpac, NAB and ANZ.
Westpac’s latest trading update showed 46 per cent of loans were written by its own staff, down from 48.7 per cent a year ago. NAB’s Andrew Irvine said it had made “good progress” in its proprietary lending. Bank of Queensland last week also said there was “momentum” in its proprietary channels.
What does the contest between banks and mortgage brokers mean for customers?
To convince people to shift away from brokers, banks will need to give borrowers a reason to do it, and price is the obvious one. But it’s hard to see banks deliberately starting a price war to win back business from mortgage brokers because that risks undermining their ultimate goal of lifting profits.
One area where banks may hold a powerful weapon in their contest with brokers, however, is digital loans – where customers fill out all the paperwork themselves and lodge it online, where it can be approved largely automatically.
Digital home loans are like a holy grail of the banking world: they’ve been promised for years, but they have so far failed to really take off. In theory, the much-hyped digital home loans should be appealing to price-conscious customers because the fact they are largely automated means they are cheaper for banks to provide and they can be priced at lower interest rates.
So far, however, they’re generally more suited to lending money to people with pretty straightforward financial circumstances, such as to full-time wage earners rather than people who are self-employed, for example. More fundamentally, there’s a question mark over just how many people are prepared to take out a home loan, the biggest financial commitment many of us make, without talking to a human being first.
Perhaps one day, digital home loans will live up to the hype and give banks the upper hand in their contest with brokers. Meanwhile, don’t be surprised if you see more bank staff, including those in the dwindling number of branches, trying to sell you a mortgage.
Ross Gittins is on leave.
