Australian mortgage brokers write 75% of loans – here’s why that’s important to bank investors

Think of Australian mortgage brokers and the famous Aussie ads that concluded with John Symond’s catchphrase, ‘At Aussie, we’ll save you!’

Indeed they can save borrowers, because they (theoretically) shop around for the best deal for their customers. Everyone will name low interest rates as what they want, but it is also about other benefits offered including offset accounts, ability to redraw and cashbacks from refinancing (if any).

The fact that in most instance the banks pay them rather than the customers means the market share has taken off, and the banks now have to live with them. There has been some controversy about whether or not this incentivises them to act in the banks’ interest rather than their customers. There is now a duty for brokers to act in the customers’ best interests, although this can be a legal grey area.

But like it or loathe it, people have voted with their wallets and mortgage brokers are part of the market. And recent data from the Mortgage & Finance Association (MFAA) has shown just how prevalent they have become.

Australian mortgage brokers write 75% of loans

Yes, you read that right, according to MFAA data. Specifically 74.6% of all new home loans were written by brokers, up 3.1 percentage points from 12 months ago and representing a total value of $103.2m (up $9.4bn in 12 months).

“MFAA’s data demonstrates the indispensable role mortgage brokers play—not just for borrowers, but for lenders as well,” said MFAA CEO Anja Pannek.

“This market share result reinforces that brokers are at the heart of Australia’s home lending system, driving access, competition, and personalised solutions in a dynamic and challenging environment.”

Why bank investors should care

While broker-written loans should theoretically be better for consumers, not for the banks. Because banks need to pay both upfront and trailing commissions to the broker ,that means less money for them. It is typically a small percentage of the total loan, but even 0.7% of $1m is still $7,000. That’s a fair amount coming out of the bank’s pocket in the first 6-12 months of a loan.

According to analysis from UBS last year, the average home loan that is sold through a broker channel, has a $3-4,000 cash-back offer and churns after 2 years has an IRR of -58.4%. No that minus sign is not a typo. On the other hand, that same analysis showed that the average loan sold through a proprietary system, without a cashback offer and lasting 6 years has an IRR of 16.7%.

So if you’re invested in one of the Big 4 Banks, one basis on which you may want to consider which one to buy is which ones have the lowest share of loans written by brokers. CBA has the crown here – Morgan Stanley from May found brokers contribute just 43% of the channel. Moreover, it is the only one of the Big 4 that has cut this figure in 5 years. For NAB, Westpac and ANZ, that analysis found it was over 60% – although this would still be below the 75% rate.

Obviously the banks have some brand recognition, and some of its deposit customers may choose to go with their childhood bank just because it is easier than shopping around. And the banks have their own lending personnel that receive their own commissions for writing loans. After the Hayne Royal Commission, CBA had a cap on bonuses of 50% of base pay, but this was increased to 80%. This reduced the incentive for their own people to leave the business and start their own franchise, thus competing with their former employer.

What about small banks?

Now, so far we’ve only talked about the big banks, but the share of brokers is arguably important for smaller banks too – think Pepper (ASX:PPM) and Auswide (ASX:ABA). In many instances, brokers are far more critical for them because they lack the brand recognition. Sure, they may lack legacy overhead costs, but often have lower margins to begin with as they have to charge lower rates. In many cases, their marketing boasts that they can help customers big banks may refuse to. Although their margins are decimated even further having to pay commissions. If you’re wondering why investors are shunning these companies however quickly their loan books may be growing.

Conclusion

Like it or not, brokers are here to stay. The more reliant on brokers your bank stock is, the lower its NIM and profit, and thus the less they’ll have to payout to you in the form of an annual dividend. So look for banks like CBA that have a lower proportion of their loan book being derived from brokers.

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