Banks vs Brokers: the high-stakes battle shaping Australia’s mortgage market
One of the more entertaining and enduring battles going on in financial circles is that between the large banks and the mortgage brokers that find and help to switch home loans for many bank customers.
It is also a highly consequential battle because the ability to compare, choose between and switch loans can literally be the difference between happily staying in a house or ending up selling and re-entering the rental market.
This is particularly the case when the cost of living is particularly high and interest rates have risen a lot, causing some genuinely difficult conditions for some households.
Bad habits returning?
There is an ethical dimension to this war as well, with some of the guard-rails around remuneration of bank staff that were recommended by the Hayne Royal Commission to reduce the potential for customers to be disadvantaged now being ignored as at least some of the banks fight to stop their better staff from jumping ship and becoming mortgage brokers.
In an ideal world – from a banking point of view – it would be great if loan customers dealt directly with their own bank and dutifully paid off their loan over time, without switching or comparing too much.
Return to the bad old days?
That ideal arguably used to exist back in the days when you had to go cap in hand to the bank manager and jump through a series of savings record and other hoops to get a loan but in the highly competitive and fast-moving world of bank finance now, brokers have carved out a very nice niche for themselves indeed.
They have, of course, been greatly assisted by the banks’ own actions of closing and rationalising branches and reducing staff but with the latest figures from the Mortgage and Finance Association of Australia showing that brokers now write almost 75% of all new home loans, it was inevitable that the banks would hit back.
They have done this in a few ways, including through setting up cheaper, no-frills online loans through subsidiaries that can’t be sold by brokers, which I covered here.
Bonuses rising again
Now they are ramping it up again by stepping back from changes made after the banking Royal Commission and increasing staff bonuses.
Commonwealth Bank (ASX: CBA) grabbed first mover advantage by increasing the maximum bonus it would pay some home lending staff to 80% of their fixed pay, up from 50% – a move that was “reluctantly” copied by NAB (ASX: NAB), with the other banks doubtless looking to make changes as well.
The rapid rise in mortgage broker loans from less than half in 2012 to 75% now is great for consumers because it means they can regularly shop around and refinance but for banks this can be terrible.
They end up paying brokers more commission on more loans and also face more customer churn and a loss of market share to smaller banks and lending institutions which don’t mind using the broker channel.
Comyn says competition forced his hand
Commonwealth’s chief executive, Matt Comyn, told a parliamentary inquiry that the bank’s move to raise maximum bonuses for some home lending staff was an attempt by the bank to keep high-performing bankers, who could otherwise make more money as mortgage brokers where they would have no limits on commissions.
His comments were quickly refuted by the broking industry which claimed that brokers are actually held to higher regulatory standards than bank staff.
ASIC also described the changes as “disappointing” and said it would be monitoring the situation to ensure there was no loan mis-selling to maximise bonuses.
CBA reducing dependence on brokers
Commonwealth has been successful at reducing its use of the broker channel, with its latest results showing broker arranged loans have now fallen to just 39%.
Partly this has been driven by pushing more competitive online loans to customers who are threatening to leave – a practice that has annoyed brokers that have at times lost new clients.
Still, some banks have no problems using brokers to grow their market share in the massive $2.2 trillion mortgage market, with Macquarie (ASX: MQG) relying heavily on brokers to rapidly grow its share of the market to a now substantial 5.5%.
Using brokers more is often a tactic by banks to quickly regain market share but CBA’s determination to originate more of its own loans is perfectly suited to its dominant position in the market.
Obviously, many mortgage brokers are not excited about Commonwealth’s actions so this will be an intriguing battle to keep an eye on as the empire strikes back.
Whether Commonwealth can pull off its “home brand” strategy or not will really shape the direction this important market heads and who gets to keep the lion’s share of the profits.