Lower margins on residential mortgages mean that efficiency and scale become more important, and that smaller players will have a harder time staying competitive. However, consolidation and regulation will make the broker industry less volatile, and will stabilize the relationship between brokers and lenders. Datamonitor estimates that, by 2010, half of new residential loans will be mediated by brokers.
The mortgage broker channel has developed into an integral part of the Australian marketplace
The Australian mortgage market experienced strong growth in the last two decades, with housing lending commitments jumping from A$13.2 billion in 1986 to A$235.6 billion in 2006. In the 1990s, mortgage originators challenged the banks, building societies and credit unions that dominated the market, triggering intensifying competition for customers. Since mortgage originators often had no proprietary distribution network, their success depended upon third-party distribution, fuelling the growth of mortgage brokers.
More recently, innovation has led to a multitude of new mortgage products to fit different borrower's needs. Most of these products were initially introduced to the Australian market by the mortgage broker channel, allowing brokers to grow their market share of lending commitments. It is estimated that 40% of new residential lending commitments are mediated through brokers.
Regulation, channel conflict and commission put pressure mortgage brokers
The mortgage broker industry is expected to become more heavily regulated. Away from federal authority, mortgage brokering currently falls under credit laws administered by the states and territories. However, there have been renewed calls for national legislation. In late 2006, the NSW Cabinet approved a number of measures that are expected to be legislated upon, including a licensing scheme for brokers.
Shrinking margins on residential mortgages have urged some lenders to reconsider broker channel distribution. Indeed, some of them offer exclusive deals through their branch channels, a system that allows them to undercut broker business. 44% of the brokers Datamonitor surveyed were concerned with increasing competition from bank branches, and many expressed dissatisfaction with perceived channel conflict and price wars. The prospect of decreasing commissions is seen as the greatest concern for mortgage brokers, with 84% of surveyed brokers admitting concern over this issue.
The broker channel is expected to consolidate and grow
It is expected that increased competition and a growing importance of economies of scale will force further broker groups to consolidate. Upcoming regulation will create greater ongoing costs as brokers will be obliged to meet regulatory requirements when providing advice to their customers, thus contributing to consolidation.
As such, large broker groups will have significantly more power to negotiate for commission schemes with banks, so there will be advantages for brokers that join aggregators. For banks, large broker groups can represent a more profitable associate than brokers that only send through business occasionally.
The increasing consolidation among mortgage brokers can thus be seen as a sign that the industry is maturing. As this happens, public perception of brokers will improve, driving further growth of the mortgage broker channel.