What's next? Mortgage broking in 2020

The home loan industry in Australia has grown at 10 per cent per annum since 2005, while the broker industry has recorded annual revenue growth of around four per cent, according to a recent report called Observations on the Value of Mortgage Broking, prepared for the Mortgage & Finance Association of Australia (MFAA) by Ernst & Young.

Around half of all residential mortgages now originate through broker channels and that’s estimated to grow to 60 per cent in the near future.

Everything’s pretty good right now, however, the industry’s growth has been primarily fuelled by record-low interest rates, which leaves the question: what happens when rates inevitably normalise and property lending slows?

Brokers should consider taking steps now, in the good times, to review and expand their value proposition, target new customer segments and diversify their revenue.

It may be too late if they leave it until the property cycle turns.

Fortunately, there’s an enormous opportunity available for brokers to take advantage of: within most suburban mortgage broking businesses, there’s a lot of latent value lying dormant.

Mortgage brokers have access to customers that financial planners and financial institutions desperately want to get close to.

This loyal customer base represents a huge opportunity.

The Observations on the Value of Mortgage Broking Report found that while consumers felt brokers delivered a superior experience, customers wanted their broker to play a broader role in arranging other financial products.

That first touchpoint

Getting a mortgage is commonly a person’s first major financial transaction, which means brokers are often their first touchpoint with the financial services industry, apart from their everyday banking.

However, while brokers are at the forefront of a consumer’s financial journey, only some go along for the customer’s whole financial journey.

The transactional nature of mortgage broking is part of the problem. Once a mortgage transaction is completed, it’s easy for the relationship to slow and sometimes end.

There’s a huge opportunity for brokers to take advantage of these “warm” leads and offer complementary solutions, such as insurance, credit cards or superannuation, before moving on to new home loan clients.

By doing so, they can better satisfy customers’ needs, diversify and boost revenue and potentially lift the value of their business.

Another consideration is that new clients may become infinitely harder to find when interest rates normalise and housing affordability falls.

As competition in mortgage broking continues to heat up, driven by low rates, low barriers to entry and digital disruption, brokers can put a ‘fence’ around their clients by developing a more holistic proposition.

A multi-product offering will help them to enhance their value proposition, build on their already strong relationship with customers and defend against competitors.

What does a modern, sustainable business look like?

Businesses that are able to meet the broad and evolving needs of different customer segments and adapt quickly to change will continue to do well in all market conditions.

However, brokers first need to uncover and understand the needs of customers before they can fulfil them, which is why market research is important.

A market research strategy doesn’t have to be formal and structured. It could be as simple as verbally asking for feedback during a client meeting or sending a short, automated client survey.

Brokers can also leverage insights from their lending partners and industry associations.

ING DIRECT, for example, regularly conducts customer surveys to uncover consumer attitudes and identify opportunities in the marketplace.

For example, the latest ING DIRECT Financial Wellbeing Report, which surveyed over 1,000 household decision makers aged 18-69 years, found one in four Australian households received help from their parents to buy a property, including nearly half of Millennials between 18-34 years. Furthermore, one in three households are renting: the highest proportion since 2010.

Another report released by the ING DIRECT in conjunction with the Financial Services Council, found 42 per cent of workers feel they don’t know enough about super to make informed decisions, with 38 per cent of respondents concerned about high fees.

In September, ING DIRECT’s Women in Finance White Paper revealed women are rapidly become key financial decision-makers and they’re increasingly interested in wealth management.

These reports provide invaluable consumer insights and we share results with our brokers and advisers to help them grow their business. It forms part of ING DIRECT’s commitment to support and equip brokers with all the tools and products they need to make it easy to do business. Broker support is one of the many reasons why ING DIRECT has been rated number one in The Adviser Third-Party Banking Report – Non-Major Lenders 2015.

Our customers also tell us that they like ING DIRECT’s multi-product strategy, which focuses on building strong relationships with brokers. Brokers also appreciate that ING DIRECT doesn’t present them with channel conflict issues.

So much more than just a low rate

In today’s uncertain economic environment, brokers who help their clients get ahead in life will not only gain the trust and loyalty of their clients, they’ll build sustainable, valuable businesses.

With the average mortgage broker’s age creeping upwards, this is increasingly important.

Not only do brokers need to attract new, preferably younger people to their business as part of their succession plan, they ideally need to find ways to boost valuations.

Broking businesses typically trade on a multiple of 1.5 times their loan book value, according to an article in The Adviser in May. By comparison, financial planning practices that offer superannuation, insurance and investment solutions, sell for around three times revenue. Top practices attract more, with buyers placing great value on growing revenue streams and non-financial factors like loyalty and goodwill.

Brokers who plan to sell their business or retire in the near future could lift their practice’s valuation by adding financial services into the mix. There are several different ways to go about this. It could be as simple as establishing a formal referral arrangement with an existing advisory firm.

The MFAA / EY Observations on the Value of Mortgage Broking Report found customers were most interested in discussing credit card (32 per cent) and insurance products alongside their mortgage product (32 per cent). Our research showed consumers were also interested in simple, low-cost superannuation solutions, leading ING DIRECT to launch Living Super in 2012 (and 2015 to advisers and brokers).

To encourage brokers to better meet their clients’ needs and diversify their revenue, ING DIRECT introduced a broker referral program, which pays brokers a referral fee of $100 for every Orange Everyday transaction account opened subject to conditions.

Brokers are also rewarded through the Living Super Referral Program, which pays a referral fee of up to $500.

Ultimately, if brokers aren’t meeting their clients’ needs and aren’t helping them get ahead in life, these customers may approach banks directly, meaning brokers may miss out on this golden opportunity.