Home a-loan this Christmas - Milford Asset

Home a-loan this Christmas

Michael Higgins

Portfolio Manager

Michael joined Milford in January 2017 and is Portfolio Manager of the Milford Dynamic Funds. Previously he spent four years at Macquarie Securities as a Senior Analyst in the Emerging Leaders Research team. Prior to that, Michael was an Analyst at the Global Research House Morningstar. Over the past seven years, his coverage has been varied across a broad range of smaller technology and industrial companies. Michael also worked as a Structural Engineer at Sinclair Knight Merz in Sydney before switching into the funds management industry. He holds a Masters of Commerce and a Bachelor of Engineering (Honours), both from the University of Sydney.

If you’re looking for a home loan in Australia today, chances are, you’re going to use a mortgage broker. In the latest home loan channel survey, 6 out of 10 residential mortgages are now originated using a broker (Figure 1). Broker share in the early 1990s was estimated to be in the teens at best! The explosion has been a function of i) a better understanding of a brokers value proposition and more competitive interest rates, ii) the consistent closure of major bank branches which have shrunk ~40% since the early 1990s, and iii) the increased complexity required in getting a loan.

The Royal Commission has also been a huge positive to brokers driven by more intrusive and detailed requests for information about income and expenditure. Interestingly, when the UK announced a similar Mortgage Market Review (MMR) in April 2014 post the GFC, broker originated loans has since ballooned to ~80%. Tighter regulation under the MMR drove borrowers into the arms of brokers, as applicants faced longer interrogations to ensure they could repay their loans.

During a recent refinance of my own 3-year-old family home loan, my bank didn’t even respond when I inquired over email about refinancing at a better interest rate. When I engaged a broker for no out of pocket expense, I had three comparison major bank rate offerings within a week that were all ~50bp sharper. The bank I ended up choosing was a major bank that not only offered a great rate but also a $3,500 cash incentive payment to move. Even when I submitted the relevant loan transfer forms, my original bank didn’t even call me back to retain my business!

Mortgage brokers increase choice and competition between lenders which in many cases lead to better service levels and competitive pricing. This is reflected in the Net Interest Margins ‘NIM’ across major banks. The NIM is the ratio between what a bank earns in interest across its loan book compared with its funding (i.e. consumer deposits). The proliferation of mortgage brokers has been a key contributor to the fall in bank profitability over the past 20 years (Figure 2).

Like the UK experience, we think the shift towards mortgage brokers is likely to continue. Milford is exposed to this thematic through our position in Australian Financial Group (AFG.ASX). AFG is currently one of the largest mortgage originators in Australia.

Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.