Banks Target Mortgage Market Dominated by Brokers

Banks’ New Strategy to Reclaim Market Share

Major banks in Australia are launching an aggressive campaign to reclaim the mortgage market from brokers. They are introducing low-cost digital-only loans, aiming to appeal to older, more tech-savvy customers.

These customers are comfortable negotiating their home loans online, bypassing traditional in-person consultations.

The banks’ goal is to disrupt the disruptors by leveraging technology and competitive pricing.

This strategic move comes as banks prepare for a fierce battle to win back the market share lost to mortgage brokers over the past few decades.

Attracting Price-Sensitive Borrowers

Banks are offering competitive rates that undercut those available through mortgage brokers or bank branches.

This tactic targets borrowers looking to refinance their home loans, who are often very price-sensitive.

By providing these attractive rates, banks hope to lure customers who might otherwise seek out brokers for better deals.

The focus is on making the refinancing process as smooth and cost-effective as possible, thereby drawing in a significant portion of the market.

This approach also aims to reduce the reliance on intermediaries, directly impacting the brokers’ market stronghold.

Emphasis on Transparency

One of the key aspects of the banks’ new strategy is increased transparency in pricing.

Banks must clearly explain how loan rates are determined, particularly concerning the property’s loan-to-valuation ratio. This level of transparency is designed to build trust with potential borrowers, who have become wary of hidden fees and opaque pricing structures.

By being upfront about costs, banks aim to differentiate themselves from mortgage brokers, who may not always provide the same level of clarity.

This approach is intended to enhance customer confidence and encourage a direct relationship with the lender.

Targeting Reliable Borrowers

Banks are specifically targeting borrowers with a strong history of meeting their mortgage repayments.

These customers are seen as less risky and more likely to benefit from the competitive rates being offered.

By focusing on reliable borrowers, banks hope to improve their loan portfolios and reduce default rates.

This selective strategy is expected to attract high-quality customers who value stability and predictability in their financial commitments.

In turn, this could help banks claw back some of the market share they have ceded to brokers over the years.

Mortgage Brokers’ Stronghold

Despite the banks’ efforts, mortgage brokers are expected to maintain a significant portion of the market.

Brokers have adapted well to the competitive landscape, offering personalized services and expert advice that many borrowers find invaluable.

The number of applications managed by brokers has remained robust, even as interest rates rise. Brokers are especially popular among younger, first-time home buyers who need more guidance through the complex mortgage process.

This enduring appeal means that, even with banks’ new strategies, brokers will continue to play a crucial role in the mortgage market.

The Role of Mortgage Brokers

According to a McKinsey & Co report, broker customers are typically younger and have lower incomes than those who go directly to banks.

These customers often lack the knowledge and experience to navigate the mortgage market independently.

Brokers provide a vital service by bridging this gap, offering tailored advice and support. This personalized approach helps first-time buyers and those with less financial literacy secure suitable home loans.

The report underscores the importance of brokers in helping these demographics, which in turn supports the brokers’ strong market position.

Changing the Narrative

Banks are attempting to change the long-standing narrative that mortgage brokers are the best allies for consumers.

Since 1995, campaigns like that of Aussie Home Loans have positioned brokers as champions against predatory banks.

However, as broker earnings have increased, this narrative is losing its impact. The perception that brokers save consumers money is being challenged by the transparency and competitive pricing offered by banks.

By shifting this narrative, banks aim to position themselves as the more trustworthy and cost-effective option for borrowers.

Broker Earnings on the Rise

The rising house prices in major cities like Sydney and Melbourne have significantly boosted brokers’ earnings.

The average Sydney mortgage broker now earns around $400,000 annually in upfront fees, with total earnings, including trail commissions, reaching approximately $670,500.

This substantial income increase highlights the lucrative nature of the mortgage broking industry. Despite the effort required to secure these earnings remaining relatively stable, brokers have benefited enormously from the property market’s growth.

This financial success underscores the competitive challenge banks face in reclaiming market share.

Commissions and Home Loan Pricing

The high commissions paid to mortgage brokers have a direct impact on home loan pricing.

Banks factor these commissions into their loan rates, meaning home buyers often pay more than they should.

This is true for both those who go through brokers and those who use the banks’ branch networks.

The inclusion of broker commissions in loan pricing highlights a key area where banks can compete by offering more straightforward, lower-cost options.

Reducing or eliminating these commissions in digital-only loan products can make bank loans more attractive to cost-conscious borrowers.

Transparency in Commissions

Mortgage brokers are subject to a “best interest” duty, yet they often direct loans to lenders offering the highest commissions.

To mitigate potential conflicts of interest, there is a call for greater transparency about the commissions brokers earn.

In New Zealand, brokers must disclose these earnings, but concerns about undue influence remain.

In Australia, political considerations have so far prevented similar regulations. Increased transparency would help borrowers make more informed decisions and could pressure brokers to prioritize customer interests over personal gain.

This change could further shift the competitive balance in favor of banks.

Regulatory Landscape

The political influence of the mortgage broking industry in Australia means significant regulatory changes are unlikely.

Both major political parties have avoided conflicts with brokers, recognizing their substantial lobbying power.

The Morrison government reversed its stance on the Hayne royal commission’s recommendation for borrowers to pay brokers, following intense industry lobbying.

Similarly, the Labor Party decided against capping upfront commissions and banning trail commissions to avoid industry backlash.

This political reality means that banks must find ways to compete within the existing regulatory framework, focusing on innovation and transparency to attract borrowers.