The major banks have taken advantage of the current mortgage market by increasing their share of home loan that used to be held by smaller lenders. These include Westpac’s takeover of St George and CBA’s takeover of BankWest.
The credit crunch has allowed the majors to squeeze smaller lenders out of the market. But there were still 13,690 mortgage brokers practicing in Australia despite the squeeze. Of those, 10,000 were individuals.
Now the Federal Government is pumping an extra $8 billion into the mortgage market to “support competition”. But will this work?
Previously, non bank lenders competed with the majors on price and grabbed a large slice of the action. Subsequently, the major banks reduced their rates and offset the loss of income by closing thousands of branches across the nation.
Some people could see that the market was reorganizing itself and that there were opportunities to start businesses. Thus mortgage brokers as we now know them established themselves.
Each lender will only deal directly with brokers who submit a minimum level of applications per month. These minimum levels might be set around the one million dollar mark and brokers must meet them to maintain a direct relationship.
This is quite an ask for most mortgages brokers. One million dollars worth or home loans may constitute anywhere between one and five successful applications. Not many small brokers would be able to meet that minimum requirement and would be able to keep that direct relationship alive.
The mortgage broking industry therefore came into existence during a time when financial deregulation took hold in Australia. Brokers effectively became the sales team for smaller lenders who were not able to reach customers through their own resources.
Most non bank lenders do not have a network of branches they can use to peddle their wares. Nor do they have a large marketing budget that will allow them to advertise on TV. Mortgage brokers fill that void by selling the products that smaller lenders offer to the general public.
Mortgage brokers receive income by way of commissions from these lenders. They are paid per application that is approved and the loan subsequently drawn down by the borrower. Sometimes some of the commissions go to aggregators or franchisors if the brokers work under them. The aggregators help the brokers get around the minimum volume requirements, which allows them to deal with more lenders and offer their clients more choice.