by Duncan Hughes
It's still party time for residential property mortgage brokers, despite the gatecrashers and party poopers trying to grab the punch bowl.
Five years of record-low interest rates, soaring property prices and dazzling profits are attracting more new entrants to the market than bidders to a weekend Sydney harbour-side auction.
A new generation of clever mobile phone app providers are offering cheaper and faster deals, reducing the entire mortgage qualifying process from days to minutes for the right borrowers.
Commonwealth Bank of Australia, the nation's largest lender, wants to increase sales through its bank branches and tighten control over other channels through buying the remaining stake in Aussie Loans, a leading broker network.
Westpac Banking Group, the second-largest lender, is rapidly digitising property conveyancing, which is likely to be integrated into some form of online loan-to-home process.
Other specialist lenders are challenging mortgage brokers with sophisticated processing and lucrative mortgage rates.
Regulators keep turning the screws with limits on the amount and types of lending brokers can do, closer scrutiny of borrowers' ability to service loans and tighter credit controls.
That's increasing pressure on leading brokerages such as Mortgage Choice to come up with new strategies to remain competitive, and expand footprints by increasing franchises.
It's about 30 years since the Campbell Report encouraged the dusting of fusty banking regulations and opened the doors to specialist advisers ready to do the legwork for borrowers.
Big commissions paid by lenders for new business encouraged brokers to visit borrowers at home, or work, to help navigate them through some 30,000 different loan products on offer.
It also happily coincided with the decision by the major banks to reduce branch networks to cut costs and focus on the astonishing surge in internet banking transactions. Smaller lenders, without branch networks, also jumped on board the broking bus.
Brokerages grew from a cottage industry to a 6800-business powerhouse, as median Sydney house prices soared from $120,000 to about $1 million and increased more than 10-fold in Melbourne to about $900,000.
Brokers account for about 53 per cent of deals and more than $2 billion in annual commissions, or about $4600 per mortgage, which is about six times the cost of simple advice from a financial adviser, according to analysis by investment bank UBS.
The nation's hot spot, Sydney, is cooling, but demand remains strong in Melbourne, refinancing is very popular and first-time home buyers are re-emerging because of state government grants and tax concessions.
Mortgage Choice's share price and earnings growth broadly follow the fortunes of the property market, which means recent performance has been strong. For example, full year 2017 net profit after tax rose 10 per cent compared to the previous year, 30 new franchises were added and revenue is being diversified.
The company's share price is up 19 per cent in the last 12 months, but the stock has gently drifted down to $2.26 after hitting a recent peak of $2.57 in March.
Industry in flux
Now the broking industry is transfixed – or being transformed – by a debate about whether mortgages are a 'commodity', like a utility bill, or a 'service', requiring advice from a specialist.
Advocates of a 'service' claim research shows the vast bulk of property buyers need expert help on a financial decision likely to influence their lifestyle for decades to come.
Brokers offer their services to clients for 'free' and earn income from an upfront commission from the lender of about 0.65 per cent of the loan's value and monthly trailing commission of around 0.15 per cent.
Champions of 'commoditising' are opening the doors to a new generation of very clever mobile appliances that provide the best rate and recommend a bank or mortgage broker.
There are seven – and counting – providers offering variations on this service. They include flongle, Tomorrow Finance, loan dolphin, finder.com, lendi, Canstar and RateCity.
Each has competitive rates and solves different problems, such as linking a borrower to a broker, lender, or both. They take a smaller commission then the traditional mortgage broker, which enables the lender to rebate some of the savings back to the borrower.
Other new competitors, such as Tic:Toc Home Loans, claim to have digitised every step in property buying to reduce the time needed to approve a loan from 22 days to 22 minutes.
That includes free property valuation, credit and identity checks, assessment of borrowing capacity and validation financials, according to chief executive Anthony Baum, whose company is 35 per cent owned by Bendigo and Adelaide Bank.
Highly competitive rates
It targets more sophisticated buyers who have 20 per cent deposits with highly competitive comparison rates of 3.69 per cent for owner occupiers and 3.99 per cent for investors. Offset accounts cost an additional $10 a month.
Former bankers, such as Tic:Toc's Baum and Joust's managing director Mark Bevan, are typical of the digital disrupters with a new model they claim is cheaper, faster and – for some borrowers – friendlier.
"We are an absolutely a disrupter," says Bevan.
Traditional brokers, such as John Flavell, chief executive of Mortgage Choice, claim this debate has been raging under different guises for 25 years.
"Mortgages are not commodities," he says. "Financial services are more complicated than prices. This is about helping make a person make the right decision."
Mortgage Choice is a distant No.3 in the sector, with about 8 per cent market share, compared to Australian Financial Group with 24 per cent and Commonwealth Bank of Australia with 14 per cent.
CBA, the nation's largest lender, has bought the remaining 20 per cent of well-known Aussie Loans and is aiming to increase the volume of loans sold through its branch network. Other major banks will be watching closely.
Annual industry growth of nearly 7 per cent for the past five years is expected to nearly halve over the next five as the industry begins to mature.
The next move for the cash rate is likely to be up, which means record-low interest rates will begin to rise and squeeze household budgets and credit growth that has been growing three times the rate of inflation and incomes.
That will slow mortgage growth already hit by a ban on overseas' lenders and recession-ridden capitals, such as Perth and Darwin.
Read more: http://www.afr.com/personal-finance/new-entrants-turn-up-heat-on-mortgage-choice-and-its-mates-20170915-gyi1ci#ixzz4tBUZfjCV
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