Residential mortgages remain the core product of most retail banks. In many Western countries, the mortgage book can represent nearly 80 percent of retail credit and nearly 40 percent of the total credit portfolio. But the mortgage market isn’t as steady as banks might wish. The COVID-19 pandemic delivered a jolt to mortgage growth, as millions of people relocated to anywhere with a good internet connection. Government interventions and monetary policy helped accelerate the trend, as increased savings and lower interest rates drive housing sales in many markets around the world.
In the past 12 months, the situation has changed dramatically—again. Rising interest rates and a cost-of-living crisis have slowed the volume of new mortgage applications, and banks are fighting over a shrinking pool of new loans. The refinancing market is also under stress. In markets where fixed-rate mortgage terms typically run two or three years, many borrowers are now looking to refinance—but many of these borrowers are in their first home, are now confronted with substantially higher interest rates, and still have almost their entire loan to pay off.
One of the winners in the turbulent mortgage climate has been the mortgage broker. A broker is a financial intermediary that connects borrowers seeking a mortgage with potential lenders. They help customers find the most suitable mortgage and guide borrowers through the complexities of the application process. Some of the biggest mortgage brokers include London & Country and Mortgage Advice Bureau in the United Kingdom, Aussie and Mortgage Choice in Australia, and De Hypotheker and Hypotheek Visie in the Netherlands (see sidebar, “A mortgage broker’s value proposition”).
In many major markets, mortgage brokers originate a surprising portion of home loans: in the Netherlands, for example, brokers originate around 60 percent of all home loans; in Australia, that proportion hovers around 70 percent; and in the United Kingdom, it climbs as high as 75 percent. (Online aggregators, another kind of intermediary, are also playing an increasing role in loan origination by bringing customers transparency and comparison support.)
Incumbent banks are losing ground against these new market forces and face increased risk of their mortgage product becoming commoditised. In response, they’re getting creative with solutions—some cooperative, some competitive. Some have lowered prices to maintain mortgage application volumes, close to the cost of capital in some cases. Still others are offering significant incentives to customers and intermediaries to win business. And some are taking on brokers directly by launching new digital attackers that market directly to customers and bypass the broker market.
What some incumbent banks have missed is the opportunity to partner with mortgage brokers. In contrast, a few banks have created a win–win situation with brokers by improving brokers’ experiences (for example, through cloud-based customer relationship management (CRM) tools), by helping them reduce their costs (for example, by helping them manage parts of their back office) and by using this fast-growing channel to grow faster than the market.
In this article, we’ll look at recent changes in the mortgage markets, the ways that the broker business model has benefited from these changes, and a playbook that banks can adopt to better compete and collaborate with brokers for mutual benefit.
A decade of structural changes
For the past several years, as housing markets boomed, some banks became complacent about their mortgage business. As a result, today their business is shrinking, they’re on the defensive against brokers and others, and as they seek to catch up, they’re not sure which issues matter most. That’s because mortgage origination, in large part, has undergone a significant transformation over the past ten years. Four broad structural trends have had the most impact:
- Digitisation of banking. The digital revolution continues to reshape how banks function. Customer demand for digital origination of mortgages is sometimes twice as high as the supply of digital mortgages. Seventy-two percent of customers now start their loan journey online. Digital mortgage offerings are gaining share in most advanced markets. These changes will continue to erode the competitive advantage of the branch network and lower the barriers to entry for new digital attackers.
- Significant shifts in economics. These new digital attackers typically have access to a wider range of capital sources than banks—namely, venture capital funding—which has allowed them to quickly enter the mortgage market. New entrants also usually have different economics than incumbent banks. Notably, their cost to serve through a fully digital operation can be 80 percent lower than that of traditional banks, which allows them to offer more competitive prices. Additionally, increasingly stringent regulations continue to drive up costs for banks, further compounding the problem.
- Rise of multibank customers. As institutional loyalty fades, customers are increasingly willing to use multiple providers to fulfill their needs. Banks and fintechs have unique selling points; customers are now happy to take the best of what each can do, rather than use just one bank to fulfill all their needs. Customers are also showing a greater propensity to switch between institutions, which has been further enabled in some markets by open banking.
- Change in customer expectations. As experiences improved in other industries, customer expectations of their banks rose significantly as well. In mortgages, customer satisfaction scores are usually considerably lower than for other banking products, mainly because the process takes so long (40 to 60 days in most cases). It’s worth noting that out of the seven reasons customers offer for choosing a mortgage bank, only two are related to price; the rest are related to experience. Finally, customer stickiness is highly correlated with this trend; satisfied customers are about 35 percent more likely to refinance their mortgage with the same bank than dissatisfied customers.
Channel evolution in response to structural changes
These structural changes have opened the door for some big shifts in origination channels. The emergence of digital technology has paved the way for a new breed of lenders that are entering the mortgage market via innovative digital platforms and gaining share from slow-moving incumbents. While big banks are making progress on the digital front, most are still a long way from a fully digital, straight-through mortgage origination. As both start-ups and incumbents race to build digital offerings, mortgage sales through the branch network continue to decline.
Meanwhile, in many markets, these structural changes have helped enable a steady rise in the number of new mortgages facilitated by mortgage brokers (exhibit).
In markets with long-established broker models, such as Australia and the United Kingdom, brokers have continued to increase their share of origination. Increases in broker-originated mortgages have also been documented in France, Germany, Canada, and New Zealand, while numbers in the Netherlands have remained steady.
The compelling customer proposition and the difficulty banks have in replicating the independence and choice offered by brokers mean that the broker model is likely here to stay.
A playbook for developing a deliberate broker strategy
In the new highly competitive landscape we’ve described, brokers are clearly ascendant, and banks should adapt accordingly. Incumbents that choose to partner with brokers—rather than focus solely on outcompeting them—should carefully consider a broker partnership strategy.
What’s in it for banks? As we’ve seen, brokers can provide preliminary assessments of customers and filter out unsuitable cases, improving the quality of applications that reach the bank. This can save banks processing time and labour costs while providing better quality loans.
But a closer relationship with brokers isn’t a risk-free proposition for banks. Although brokers can provide a steady source of new business, banks risk losing the value-added part of the mortgage relationship and becoming a mere provider of capital or end up depending on brokers, which is not healthy in the long term. What’s more, working with brokers can put pressure on banks’ margins through a combination of increased price transparency and the often-sizable commissions they pay to brokers.
Forward-looking retail banks can develop and deploy a deliberate strategy toward brokers by asking and answering three questions.
How do customers choose a mortgage channel?
Banks should start with a clear-eyed view. No matter how good a bank’s customer life-cycle management and direct-to-consumer channels are, most mortgage buyers aren’t yet customers. And while many mortgages are purchased by two buyers, the odds are that at least one of them is not a current customer. Partnering with brokers will be required to reach customer segments that are not already on board. Our experience and the latest research offer some guidelines:
- Customers are informed. Most customers will do some research before speaking to a bank or a mortgage broker—around 90 percent, according to a recent customer survey in Australia. When doing their research, customers are interested in comparing interest rates and determining which banks are offering the best home loan deals (considering cash backs or other incentives).
- Customers return to their previous channel. Customers are more likely to return to their last provider, whether it is a broker or a bank. What’s more, once a customer uses a broker, they are likely to return to that specific broker for new business.
- Certain customer segments favour brokers. Customers who favour brokers are typically younger and have a lower income than those who start their shopping with banks. Broker customers are also more likely to be first-time home buyers; in such cases, they work with brokers to bridge a knowledge gap. If banks are looking to grow these segments, partnering with brokers is often essential.
What makes a bank’s offering attractive to both brokers and the borrowers who favour them?
Banks can develop specialised propositions that are distinct from their proprietary mortgage offerings for brokers and the customers they typically serve. Let’s start with borrowers. Beyond the conventional factors that attract customers to banks, there are certain distinct considerations for customers who engage brokers:
- Pricing is often the most important factor for mortgage customers—but it’s even more important for brokers’ customers. Price transparency and an online tool to compare the bank’s rates with others should be the starting points. Transparent headline rates can mean more visibility on broker aggregator portals; showing up in the first few results can be crucial in a crowded mortgage market. Clearly defined up-front pricing based on specific criteria will further enhance pricing transparency.
- Policies should be transparent and clearly communicated. Banks should start by ensuring their policies are consistent and fair, then make sure brokers are well-versed enough to recommend products that are best suited for customers’ specific needs. Banks with clearly defined credit policies are likely to gain preference from brokers for specific target customer segments. Major banks in the United Kingdom and the Netherlands—such as the Royal Bank of Scotland, Yorkshire Building Society, and Rabobank—have defined distinctive offerings for brokers based on service model, credit policy, or product type.
When it comes to brokers, banks should devote their efforts to defining a “broker experience,” just as they’ve done for the customer experience. By collaborating with brokers to cocreate and actively listening to their feedback, banks can establish a reputation for providing an exceptional broker experience that will attract more brokers to their institution. A great broker experience includes the following:
- Efficiency in digital processes. This includes compatibility with aggregators’ portals, swift turnaround times, high-quality credit assessments, policy consistency, and timely communication of progress supported by digital tools such as online document management and digital signature.
- Specialised support. Banks can create teams to work exclusively with brokers with tiered service levels depending on broker status. Top-tier support can include helping to “workshop” customers’ special cases.
- Tools to lower brokers’ costs. Banks can invest in technology that they can share with brokers (such as a CRM system) and help them reduce their costs. Other ideas include paying commissions promptly, which will help brokers to better forecast and manage their cash flow. Prompt and accurate payment is often better than paying a higher commission.
What are the implications of the broker strategy on the proprietary channel?
The continued rise in broker-originated loans is prompting banks to reevaluate the role of proprietary channels. With broker penetration rates reaching as high as 80 percent in some markets, banks are grappling with whether to bolster their proprietary offerings or pull back.
Banks are taking steps to maintain direct customer relationships. One common step is to build a one-stop-shop infrastructure for home buyers that increases new origination and helps to stop attrition (that is, mortgage switchers). In this one-stop shop, banks can coordinate across mortgages, insurance, utilities, and maintenance to provide a real estate concierge service by subscription. In expanding its menu of services in these ways, banks can become less dependent on brokers.
As part of that strategy, banks may need to develop separate brands with differentiated propositions: one brand that targets the broker market and a main brand that is safely ring-fenced. Credit policy, service model, and turnaround time are often used as the key differentiators in the market for separate brands. For example, Nationwide Building Society has used a subbrand (The Mortgage Works) to specifically target the buy-to-let market in the United Kingdom.
Some banks may even consider a future in which brokers are disintermediated and customers seek out direct digital-only mortgages from banks. In some markets, that future is already here. For example, in Australia, the Commonwealth Bank launched Unloan as a direct digital-only refinancing business targeting price-conscious homeowners with a digital application, notable for an industry-best application time of less than ten minutes and annual loyalty rewards.
In our view, brokers will play an increasingly significant role in mortgage origination over the next several years. But banks that take a deliberate approach can create win–win solutions that ensure loyalty and avoid commoditisation.