When you think of Australian mortgage brokers, you might recall iconic marketing campaigns like John Symond’s memorable catchphrase: “At Aussie, we’ll save you!” Indeed, mortgage brokers can potentially save borrowers money by shopping around for the best deal. While low interest rates are the top priority for most borrowers, other features such as offset accounts, redraw facilities, and refinancing cashbacks also play a significant role.
What makes mortgage brokers particularly appealing is that their services are often free to customers, as brokers typically receive their payments from banks. This model has significantly boosted their market share. However, concerns have arisen about whether brokers act in the banks’ interests or those of their customers. The introduction of a legal duty for brokers to act in their clients’ best interests aims to resolve this, but there remains a grey area in its enforcement.
Regardless of the debates, the popularity of mortgage brokers continues to grow, as reflected in recent data from the Mortgage & Finance Association of Australia (MFAA).
Australian Mortgage Brokers Write 75% of Loans
According to MFAA data, mortgage brokers wrote an impressive 74.6% of all new home loans in Australia over the past year. This marks a 3.1 percentage point increase compared to the previous year and represents a total loan value of $103.2 billion, up by $9.4 billion.
Anja Pannek, CEO of the MFAA, emphasized the critical role mortgage brokers play in Australia’s home lending landscape: “This market share result reinforces that brokers are at the heart of Australia’s home lending system, driving access, competition, and personalized solutions in a dynamic and challenging environment.”
Why Bank Investors Should Care
While broker-written loans often benefit consumers, the story is different for banks. Brokers’ services are funded through upfront and trailing commissions paid by the banks, cutting into their profit margins. Even a seemingly small commission—like 0.7% of a $1 million loan—equates to $7,000, which can be a significant expense for the bank in the early stages of the loan.
A UBS analysis highlights this financial strain. It found that broker-channel loans with cashback offers and short lifespans (often churning after two years) result in an internal rate of return (IRR) of -58.4%. By contrast, loans sold through proprietary channels, without cashback incentives and lasting six years, generate an IRR of 16.7%.
For investors in the Big Four banks, these dynamics matter. Commonwealth Bank of Australia (CBA) stands out as the least reliant on brokers, with only 43% of its home loans originating through this channel. This figure has decreased over the past five years, setting CBA apart from its peers, NAB, Westpac, and ANZ, where broker-channel loans exceed 60%.
CBA’s approach includes leveraging its strong brand recognition and incentivizing its in-house lending personnel through commissions. After the Hayne Royal Commission, CBA initially capped bonuses for staff at 50% of base pay, but later increased it to 80% to retain talent and deter employees from setting up competing broker franchises.
What About Small Banks?
For smaller banks like Pepper Money (ASX: PPM) and Auswide Bank (ASX: ABA), mortgage brokers are even more critical. Lacking the brand recognition of the Big Four, these banks rely heavily on brokers to reach customers. Their marketing often highlights their willingness to serve borrowers that major banks might reject. However, this strategy comes at a cost, as smaller banks must offer lower rates and still pay broker commissions, further eroding their profit margins.
This reliance on brokers, while enabling smaller banks to grow their loan books, often makes them less appealing to investors. Despite expanding customer bases, their profitability suffers due to higher operational costs and tighter margins.
Conclusion
Whether you’re a fan of mortgage brokers or not, one thing is clear: they are a permanent fixture in Australia’s home lending market. For bank investors, this trend has significant implications. Banks that depend heavily on brokers may face lower net interest margins (NIMs) and reduced profitability, impacting their ability to pay dividends. Conversely, institutions like CBA, which have minimized their reliance on brokers, may offer a more stable return on investment.
Ultimately, understanding a bank’s exposure to the broker channel is crucial for making informed investment decisions. As the industry continues to evolve, so too will the dynamics between banks, brokers, and borrowers.