Changes in the Lending Market Over Time

Competition setbacks in the banking industry have lifted rates because they have allowed the major four banks to dominate the market, driving out smaller players. These include Westpac's takeover of St George and CBA's takeover of BankWest.

Also, due to the credit squeeze, the major four banks have almost entirely pushed all other players out of the home lending market. Despite this, there are still over 13,000 mortgage brokers in Australia. The majority of these are individual brokers.

Now the Federal Government is pumping an extra $8 billion into the mortgage market to "support competition". But will this work?

Previously, non bank lenders competed with the majors on price and grabbed a large slice of the action. Banks reduced their interest rates in order to compete and commenced internal operational reviews, which resulted in some 2,000 branches being closed and many mortgage lending officers/bank managers being retrenched.

Some people could see that the market was reorganizing itself and that there were opportunities to start businesses. Thus mortgage brokers as we now know them established themselves.

Each lender will only deal directly with brokers who submit a minimum level of applications per month. For example, a particular bank or non-bank lending institution might refuse to deal with an entity that cannot close at least one million dollars worth of mortgages with them on a monthly basis.

For most mortgage brokers this may seem like a daunting task. A broker would have to submit about four or five applications to hit the one million dollar threshold. Only a few individual brokers would be able to close at least that much business each month and would therefore be able to do business with the particular lender.

The mortgage broking industry therefore came into existence during a time when financial deregulation took hold in Australia. Brokers effectively became the sales team for smaller lenders who were not able to reach customers through their own resources.

Most non bank lenders do not have a network of branches they can use to peddle their wares. They also do not have the money to advertise on television. Mortgage intermediaries fill that gap and offer products from non bank lenders to the general public.

Mortgage brokers receive income by way of commissions from these lenders. They are paid per application that is approved and the loan subsequently drawn down by the borrower. Many brokers work via aggregators or franchisors and need to give up part of their commission to do so. The aggregators help the brokers get around the minimum volume requirements, which allows them to deal with more lenders and offer their clients more choice.

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