HOUSE RULES

Change is afoot in the mortgage industry. We take a look at what’s ahead for home loans and the mortgage franchise sector.

What’s ahead for home loans and mortgage brokers?

With the dream of owning their own home becoming less of a reality and more of just that – a dream – Australians are finding it tougher to meet the stringent credit criteria put forward by traditional lending companies.

And with the regulatory spotlight shining brightly on the banking and financial services sector, what does this mean for incoming franchisees? Will the market get tougher?

James Hickey, Deloitte financial services partner and chair of the Deloitte Australian Mortgage Report roundtable, says there is uncertainty around possible new rules and legislative change as a result of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

“Conduct, compliance and distribution challenges will continue to take centre stage for lenders as the Royal Commission moves through 2018, and the coming of the ‘open data’ regime gives promise to what will become a more ‘customer in control’ future.”

Putting the customer in control is reliant on three things: technology, the opening up of data, and broker evolution, according to the 2018 Deloitte Mortgage Report roundtable of lenders.

The lenders also agreed that refinancers will dominate the market and first home buyers will have access to greater opportunities than in recent years, with investor and interest-only loans continuing to pull back in response to the tightening of credit for these products.

Owner-occupier principal-and-interest (P&I) borrowers will continue to be highly sought after by lenders and such consumers can exert competitive pressure to seek the best deal for themselves in the market as well as take advantage of the low interest rate environment to build up equity against their mortgages.

Deloitte Access Economics’ director Michael Thomas says “Regulators aiming to restrain increasing property debt amid concerns of an overheating market have targeted investor lending. Tighter lending standards and restrictions on the volume of ‘interest-only’ loans to total new residential mortgages have pushed up rates for investors. Market activity has begun cooling, with house price growth slowing in the latter half of 2017 and continuing into 2018.”

However, the residential market generally continues to be buoyant, he believes, due to population and jobs growth

– though this is unevenly spread across the country.

“The outlook for construction activity in the near-term varies across the state. For both New South Wales and Victoria, growth in housing construction has slowed from its peaks but remains at high levels and is underpinned by solid underlying demand.

“Taken together with the outlook for interest rates, slowing house price growth, moderating the prospect of further capital gains, restrictions on lending such as on interest-only loans and loans to investors as well as to lending to foreign investors, we expect a period of moderation rather than an abrupt adjustment.”

Deloitte financial services partner Heather Baister says the Combined Industry Forum (CIF) comprising banks, broker groups and consumer representatives is already looking into ways of addressing the issues of transparency and distribution oversight, as well as accountability around mortgage lending.

“This is on the back of ASIC’s review into mortgage broker remuneration and the continued focus by APRA on serviceability assessments by lenders.”

So what’s happening among mortgage franchise chains?

MORTGAGE CHOICE REVISIONS

One of the biggest names in the home loans market, Mortgage Choice, is overhauling its payment structure after disgruntled franchisees voiced their dissatisfaction with the current model.

The publicly listed mortgage broker announced it would be raising the average rate of broker commissions on home loans from 65 per cent to 74 per cent under the new agreement.

The new model put forward by Mortgage Choice, which will be offered to all franchisees on an opt-in basis from August 2018, will feature;

• an increase in the average commission pay-out rate on residential lending from 65 per cent to 74 per cent;

• a unique hybrid commission structure which pays the best monthly outcome on either a flow or book basis;

• a reduced income volatility, providing better protection for franchisees in the event of a market downturn. Franchisees spoke out against the company’s model following a joint investigation from The Age, The Sydney

Morning Herald and ABC’s 7.30 program, revealing that as many as 173 Mortgage Choice franchisees were considering legal action against the broker.

The broker commission changes signify the message is getting through, with Mortgage Choice CEO Susan Mitchell telling analysts and investors the brand has seen its market share decline due to a broker remuneration model that is “not as competitive as it once was”.

Mitchell believes the overwhelming financial reward will see all of the broker franchisees likely to opt-in to the new model.

“When we commenced discussions with franchisees, it was with a view to introducing a model that allowed them to earn more so they had the confidence to invest in their business, while still supporting them under a national brand with the services they value including

IT, compliance, training, marketing and business planning,” Mitchell says.

“The hybrid trail commission structure we are introducing is unique. It rewards franchisees as they grow and provides better earnings certainty through periods of investment. We believe all franchisees will adopt the new model as it caters for businesses across the life cycle spectrum, from greenfield to more established brokers.”

For Mortgage Choice, the decision

to re-evaluate the current remuneration model demonstrates a commitment from the brand to franchisee retainment.

To further repair relationships with franchisees, Mortgage Choice has also elected to continue investment in support operations, initiating a program that aims to improve operating efficiencies.

“These changes are the product of extensive consultation with broker franchisees and the recognition we needed to rebalance our service provision with more competitive remuneration,” says Mitchell.

“Franchisees will have access to the same core services, just delivered in a more efficient way. At the same time, we are investing in a new broker platform that will improve broker productivity and enhance their service levels to customers.”

“The demand for the services of a mortgage broker is strong and we believe these initiatives will provide the platform for a sustainable business model for Mortgage Choice and a framework for franchisees to succeed by helping more Australians make better financial choices.”

SMARTLINE’S NEW CHIEF

Mortgage broking finance group, Smartline has announced the appointment of Sam Boer as its new CEO.

Boer joins the Smartline group from Commonwealth Bank of Australia, where he served as general manager, Third Party Mortgage Brokers.

The news comes one year after the group’s acquisition at the hands of REA group, who received an 80.3 per cent stake in Smartline in June 2017, further strengthening its home loan offering, which also includes realestate.com.au Home Loans and realestate.com.au Home Loans broking.

The 2017 deal, worth over $67 million, saw Smartline’s over 300 advisors around the country and $25 billion loan book integrated into the REA portfolio, which is majority owned by NewsCorp.

Andrew Russell, REA Group executive general manager – financial services, says Boer’s history in the retail lending sector would provide Smartline with the best opportunity for growth moving forward.

“Sam brings a wealth of experience to this role and has a long history of leading high performing teams to deliver value for customers,” Russell says.

For Boer, who boasts more than 29 years of experience in personal and professional financial services, the appointment presents a new opportunity to work alongside franchisees.

Currently, Smartline franchisees receive a 24-month mentoring program and access to extensive business training and coaching, with the brand looking to expand further.

Chris Acret, Smartline executive director and co-founder, says Boer’s appointment will allow the business to further its financial services franchising operations.

“We’re delighted that Sam will be joining Smartline to lead the business into our next chapter of growth with REA,” Acret says.

“We’ve known Sam a long time, he has strong industry experience and we are very comfortable that he will be a good fit for the business and our people.”

FLEXIBLE SOLUTIONS

Red Rock Mortgages has emerged as a leader in flexible, customer-focused finance solutions, tailoring their services for borrowers whose circumstances are a-typical and outside the box.

Andrew Cowan, Red Rock Mortgage Group’s managing director, believes the consumer-centric approach is core to the company’s success.

“The business was established in 2004 as a specialist mortgage manager primarily catering to the self-employed market,” Cowan says.

“Since inception it has grown to become a leading specialist mortgage finance company providing mortgage finance solutions for a range of borrowers whose financial circumstances are often 'outside the square' of the traditional lenders’ requirements.”

“We are a very different mortgage finance company; at our core, our focus and expertise has for many years been on providing tailored mortgage solutions for borrowers unable or unwilling to satisfy mainstream lending criteria.”

For many Australians, the looming reality of bad debt and credit scores can be a dream killer, however the emergence of flexible finance facilities has opened new opportunities for prospective homeowners.

“The market demand for alternative finance solutions has never been greater. The current regulatory environment and the increased public pressure on the mainstream banks is seeing more and more people being turned down for finance for a range of reasons,” Cowan says.

Now, following a successful tenure as a specialist finance mortgage provider, Red Rock has announced plans to diversify, launching a Victoria-wide franchise model into the market.

Cowan believes the current economic climate, mainstream banking uncertainty and increasing demand for flexible finance solutions make it the perfect time to branch out.

“We believe this to be an ideal time to expand our national footprint via a franchise distribution network that creates value for our stakeholders and a fantastic and rewarding business opportunity for franchise operators wanting to make a real difference to people’s lives through flexible finance solutions that work.”

For franchisees, the opportunity presents a chance to develop and further their career with an industry partner committed to ongoing support and caseby-case evaluation.

“Our unique mortgage franchise opportunity offers the best of both worlds: the freedom of running your own finance business in a flexible format, with low overheads and a very affordable initial investment coupled with the unique ability to build a regular passive income stream,” Cowan says.

“Our model has been carefully considered to provide a high level of differentiation in a competitive marketplace and also give our franchisees flexibility to earn more margin per deal than others by taking a unique approach.

“We provide a range of support and tools for our franchisees, starting with comprehensive induction training covering all aspects of mortgage origination, credit advice and sales training, as well as dedicated relationship and onboarding managers to help grow and assist franchisees in the operation of their business.”

The mortgage finance specialist’s announcement demonstrates the company’s desire to grow and solidify its place at the top of the flexible finance solution industry.

Currently, the expansion is slated for Victoria, however according to Cowan, considerable growth in the state could lead to greater expansion elsewhere.

“Our vision is to build our national network of specialist mortgage franchisees by becoming Australia’s first choice for specialist finance. Our expansion plans for the next 12 months are the rollout of our Victorian territories and then launch interstate the following year,” says Cowan.

Deloitte’s Baister cautions the market to be ready for increased requirements, and a slower growth for business.

“While there are current laws already in place to manage conduct, I expect to see a greater obligation for lenders beyond the current ‘must not be unsuitable’ legislative hurdle.

“In the future, lenders will have to consider how they can demonstrate that the customer has a true understanding of their product. This will mean a more thorough assessment process, tailored to individual customers and their understanding of the loan. This will inevitably slow market growth.”

Tighter lending standards and restrictions on the volume of interest-only’ loans to total new residential mortgages have pushed up

rates for investors.