How mortgage broking has changed in Australia
Mortgage broking has undergone a significant shift over the last forty years in Australia, with the sector experiencing its most pivotal shift in 2020.
So, what exactly has changed in the Australian mortgage broking industry?
Initially, mortgage brokers provided price comparison services and helped with loan applications. Brokers were mostly used by regional banks and lenders and charged a fee. In the early 1990s, this all changed.
Thanks to the ingenuity of competitors, and the establishment of independent mortgage broking companies, there was a shift in distribution channels. But there was also a shift in focus by banks amid the turmoil caused by “the recession we had to have.”
Interest rates hit 17 per cent and many businesses collapsed, resulting in a significant decline in demand for corporate sector lending. Banks were hit hard by high levels of business bankruptcy, however residential lending remained reasonably solid.
As a result, banks shifted focus from business lending to home loans. According to the Reserve Bank of Australia (RBA), by 1995 the share of residential lending by banks rose from 30 per cent to 46 per cent while the share of business lending dropped from 63 per cent to 48 per cent.
Wholesale lenders entered the market during the 1990s, introducing a range of new mortgage products such as home equity loans, interest-only loans and low-doc loans. And they were aggressive in their marketing, offering highly competitive interest rates and relaxing the evidence requirements around income.
It didn’t take long for banks, building societies and credit unions to follow suit. By the turn of the century, institutions were offering discounts on standard interest rates and new products targeted specifically to the needs of people who couldn’t meet standard lending criteria.
Additional home loan features were also introduced at this time are still prevalent today, such as redraw facilities and offset accounts, that make managing mortgages easier for borrowers.
Increased competition brought choice and confusion for borrowers who needed the help of mortgage brokers to navigate the mortgage market.
The days of simply relying on banks and lenders were done, allowing for businesses such as ours to provide a personal tailored service.
The impact of the Global Financial Crisis (GFC)
There’s a saying with its origins harking back (somewhat surprisingly) to the Napoleonic era that “when America sneezes, the rest of the world catches (a) cold.’’ The GFC experienced during the mid-2000s is evidence of this.
This excellent summary from the RBA explains why Australia, and the rest of the world, witnessed a catastrophic financial time from mid-2007 to early 2009. Market funding dried up and non-bank lenders lost their footing. International banks withdrew from the Australian market and repatriated their money back to Europe and America. Homeowners were suddenly unable to meet their mortgage repayments. Stock markets around the globe collapsed.
The Australian Government committed to a $10.4 billion economic stimulus package. This included a doubling of the first home buyer’s grant to $14,000 for existing homes and a tripling to $21,000 for new homes. As the recession eased, so too did the purse strings of the Australians.
The Royal Commission
Ten years on, a Royal Commission into Banking, Superannuation and Financial Services put brokers in the spotlight. The Royal Commissions’ recommendations were forthright and pause for thought, they align the broker with the borrower and their best interest rather than a distribution arm of the lender.
Some concerns were raised opposing parts of the recommendations:
- Trail commissions allow for mortgage brokers to provide a continuing service, and building a relationship, with clients even after the loan is settled,
- Mortgage brokers provide a “voice” for smaller lenders, allowing them to introduce and distribute their products,
- Introducing competition to the market will result in lower interest rates. The increased pressure will fall onto the shoulders of lenders, and
- The commission paid by lenders allows borrowers to access mortgage brokering services at a cost to the lender. A “buyer pays” model may affect services offered by brokers that will become inaccessible to many.
- Heading into the 2020-21 financial year, we see increased scrutiny and a best interest duty that maybe the paradigm shift brokers need. As community standards, consumer needs and the financial markets change, so also will mortgage broking.
What do these changes mean for mortgage brokers and their clients?
There has been a paradigm shift within the Australian mortgage broking space, there are benefits and protections for mortgage brokers and borrowers.
Today a broker provides a solution, not just a comparison or help with an application. Brokers are able to offer credit advice to their clients for a fee and implement a solution that may or may not pay a commission.
This was once out of the question, but mortgage broking has adapted to best suit a range of consumer needs. As finance affects every aspect of life, a mortgage broker tour guides borrowers through their short and long term goals of life.
Tired of the mortgage broking merry-go-round? Talk to us today
Given the roller-coaster ride of the past four decades, there is no doubt that mortgage brokers are far better placed to help borrowers. But for many brokers the transition has given rise to considerations of their future in the sector.
If you’re considering a new direction, now is the ideal time to speak with Brilliant Brokers and make the most of the only resource in short supply.... TIME.
You can profitably opt out, yet stay engaged and relevant without the hassles, paperwork and stress that mortgage broking has become. We can also help with an exit strategy for a seamless transition to what you love to do.
Get in touch with me today to learn more about how to reap ongoing benefits for your trail book, without the added stress.
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