Spotlight - Crossing the ditch

Investors, however, appear to be withdrawing from the market, the survey also notes.

Improvements in the real estate sector are starting to be reflected in the mortgage industry: “We are definitely seeing lenders getting interested in lending again and the core real estate market is starting to show some small improvement,” New Zealand Mortgage Brokers Association (NZMBA) chief executive Darren Pratley says.

“It has been a tough time and it has certainly been challenging for a lot of brokers, but there is a bit of optimism now that we are on the right side of it,” he says.

Any comparisons with Australia, however, need to be tempered by the small size of the population.

Fewer than five million people live in New Zealand, a fact that in part defines the broking industry, says Provident Capital’s Steve Sampson.

“New Zealand has a small population, which means a smaller market, which means fewer banks, which means less banking competition, which means it is easier for the banks to dictate and control the sector,” Mr Sampson says.

“There are currently really only five banks and five non-banks in play,” he says.

The biggest challenge for brokers is a lack of lenders in the marketplace.

This has not only given the majors greater control over commission structures, it has weakened the broker proposition.

Does any of that sound familiar?

LACK OF COMPETITION

In Australia, the rise of second-tier lenders and non banks injected much-needed competition into the mortgage industry.

Almost all Australian lenders now recognise the third party channel, and broker market share for home loans currently sits at 41 per cent.

In New Zealand, a shortage of lending options means clients are less inclined to approach a broker for advice.

NZMBA’s Darren Pratley estimates the New Zealand broker market share to be between 25 and 30 per cent. “We are probably still heading towards that 30 per cent mark,” Mr Pratley says.

“What we are seeing is that your scale and also the number of lenders in the market has given the Australian broker market a lot of opportunity and a lot of stability,” he says. “Here in New Zealand, we’ve had a lot of lenders leave the marketplace.

“That has put a lot of pressure on the options available for brokers to use.”

The majors, as a result, now dominate the New Zealand market. Sovereign, Kiwibank, ASB (owned by Commonwealth Bank) and BNZ (part of National Australia Bank) are the key players and are seen to be responsible for the gradual decline in broker trail commissions.

“There are only a couple of lenders who are paying trail, which is becoming a bit of an issue,” Mr Pratley says.

BLAZING A NEW TRAIL

The majors’ decision to move away from paying trail commissions was a strategic one, driven by their bolstered position achieved off the back of the lack of alternative lending options.

It’s also due to the lenders’ reluctance to pay trail commission when the majority New Zealanders opt for fixed-rate, and hence low maintenance, mortgages.

While most lenders have cut trails completely, there are still a few that include trail in their commission structure.

Sovereign, a subsidiary of ASB, pays brokers 0.4 per cent up front, with 0.1 per cent trail. Most other lenders pay an average 0.6 per cent up front with no trail.

Kiwi borrowers differ culturally from their Australian counterparts in that they have an aversion to variable rate mortgages, a preference that has shaped New Zealand’s broking industry.

“Up until about a year ago, we were seeing that 85 to 90 per cent of all mortgages in New Zealand were fixed,” Mr Pratley says. “At the moment, close to 60 per cent of home loans are on a variable rate.”

So, might things be changing?

“This is the first time we have been down this track for a very long time and it’s definitely a new psyche for New Zealand borrowers,” he says. “That’s for sure.”

Years of fixed rate mortgages have, however, had an impact on the broking industry. Customers are effectively locked in to their existing arrangements, reducing the propensity for refinance deals.

This, coupled with dwindling trail commissions, has forced brokers to seek out alternative sources of income.

“We do get paid for re-fixing [the rate on a loan],” says Paul Fuller, a broker and director of New Zealand brokerage Prosper.

“Some lenders will pay us a fee of between NZ$100 and NZ$150 for talking to a client and negotiating an additional fixed-rate term and doing the paperwork,” he says.

A broker with eight years’ experience, Mr Fuller is this year’s NZMBA Broker of the Year. He won the coveted award based on the quality of his service offering, rather than on the size of his loan book.

“I have never relied on trails,” Mr Fuller says. “It’s all about building the relationship with the client and encouraging them to come back when they want to re-fix or if they are looking to take on some additional lending.”

The New Zealand broking industry recently underwent some major regulatory reforms, which emphasised the need for brokers to diversify – in much the same way the NCCP has done in Australia.

Cross selling into insurance products is now one of the most important aspects of Mr Fuller’s business.

“We do sell add-ons like insurances,” he says, “so that is a fundamental that has been helped by the new regulations, making sure the client has the complete package for their individual needs – and it helps us with the income side of things.”