Why the big banks have copycat plans to sell you a mortgage

Mortgage brokers have enjoyed a meteoric rise since the 1990s and now dominate the way most Australians borrow money to buy property. About 75 percent of new mortgages are going through brokers today, up from 56 percent in 2019.

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Given that brokers are so prevalent, banks have no choice but to work closely with them, but from the perspective of the big four bank investors, this comes at the expense of profits. This is because banks pay brokers upfront and ongoing commissions for each loan they arrange, making these loans less profitable than loans written by a bank employee.

Banks largely blame themselves for this situation. By closing branches and using brokers, banks effectively outsourced their sales and allowed another party, the brokers, to be closer to their customers. In financial jargon, banks have allowed themselves to be “disintermediated” while the product they sell is “commoditized.”

That’s one reason why banks’ retail banking divisions, which once doled out rivers of gold, have been making less money in many cases lately.

More importantly, customers don’t see this as a problem. The majority of people seem to prefer working with a broker who is not affiliated with a particular bank and can offer them a variety of home loan options. By bringing more transparency to the mortgage market, brokers have helped increase competition, which is good news for consumers.

There is also a large bank that has taken a very different approach to its peers; That’s Macquarie. The “millionaires’ factory” relies almost entirely on mortgage brokers to underwrite its loans because it has no branches. This strategy, along with technology that enables Macquarie to give customers quick decisions on approving loans, has enabled Macquarie’s rapid growth.

Morningstar’s Nathan Zaia says Macquarie grew 4.4 times faster than the market last quarter and if it maintains that growth its mortgage book will almost double in five years.

But there is now a clear push among the big four lenders to counter the rising tide of brokers. So will banks succeed in convincing more people to take out loans directly rather than through a broker?

Commonwealth Bank has succeeded on this front, and rivals appear to be trying to copy its strategy (understandable given that CBA’s massive retail banking unit is seen as a money-making machine). CBA’s latest results showed it kept its share of private loans steady at 54 percent, a much higher share than its rivals.

But banking watchdogs think it will be difficult for Westpac, NAB and ANZ to reverse the rising tide of broker-arranged loans.

Westpac’s latest trading update showed 46 per cent of loans were underwritten by its own staff; This rate was 48.7 percent compared to a year ago. NAB’s Andrew Irvine said it was making “good progress” on its private loans. Last week the Bank of Queensland also said there was “momentum” in its private channels.

What does competition between banks and mortgage brokers mean for customers?

To persuade people to move away from brokers, banks will need to give borrowers a reason to do so, and the price is clear. But it’s hard to see banks deliberately launching a price war to take back business from mortgage brokers because it risks undermining their ultimate goal of increasing profits.

But one area where banks can have a powerful weapon in their competition with brokers is digital loans, where customers fill out all the paperwork themselves and submit it online and can be approved largely automatically.

Digital home loans are like the holy grail of the banking world: They’ve been promised for years, but so far they haven’t really taken off. In theory, much-hyped digital home loans should be attractive to price-conscious customers because the fact that they are largely automated means they are cheaper for banks to provide and can be priced at lower interest rates.

But so far they are generally better suited to lending to people with fairly simple financial circumstances, such as full-time salaried employees, rather than the self-employed, for example. More importantly, there is a question mark over how many people are prepared to take out a home loan, the biggest financial commitment most of us make, without speaking to a human first.

Maybe one day digital home loans will catch up with this excitement and give banks an edge in the competition with brokers. In the meantime, don’t be surprised if you see more bank staff, including those at a dwindling number of branches, trying to sell you a mortgage.

Ross Gittins is on leave.