This report does not constitute a rating action.
Key Takeaways
- Curbing their reliance on mortgage brokers could allow Australian banks to boost their net interest margins and profitability.
- Banks are heavily investing in their proprietary channels to regain ground from brokers, who originate about 60%-70% of their new mortgage lending.
- Any marginalization of brokers will be gradual, in S&P Global Ratings' view, and is unlikely to affect our ratings on banks over the next two years.
Australian mortgage brokers may be on notice. Less mortgage origination through brokers, all else equal, means better returns for banks and potentially better pricing for borrowers. This could eventually support bank margins and earnings. Brokers' stronghold on the residential mortgage market eats into margins in an already competitive product segment.
Banks aim to turn the tide. By driving more customers to in-house channels--like branches, call centers or increasingly digital channels--they could increase margins and boost profitability.
While many Australians still favor person-to-person interaction for this milestone purchase, a new generation of tech-savvy borrowers continues to embrace digital solutions. We believe banks will capitalize on this.
By digitizing the mortgage process and offering greater price transparency, banks might dilute the mortgage broker value proposition. Any shift will be gradual as banks wrestle with legacy technology and customers become more comfortable with direct digital lending channels.
As such, it's unlikely to have a material effect on our bank ratings in the next two years. That said, if banks are successful, it could boost margin and profitability. This could shore up the already strong capital and earnings profiles of the Australian major banks.
Banks Have A Love-Hate Relationship With Brokers
Today, it's cheaper for banks to generate new business through in-house channels. In our view, almost every bank in Australia is looking for ways to attract more customers through proprietary channels, avoiding paying commissions to brokers.
About three-in-four Australian borrowers currently use a mortgage broker for help in getting the best loan with the least friction. This makes a competitive broker offering a necessity for almost every bank in Australia, but it comes at a cost.
Brokers typically operate on a two-stage commission structure. Banks pay an upfront fee on the drawn loan amount (typically about 0.65%) and a trailing fee over the life of the loan (typically about 0.15% a year). This dramatically reduces the margin of broker-originated loans.
Banks walk a fine line when it comes to mortgage distribution. They rely on brokers to capture the bulk of new business--since that's where most customers go--but simultaneously work to preserve margins by attracting as many borrowers as possible through direct channels.
Mortgage Profitability Is Declining
The Australian mortgage-lending business is heavily commoditized. Borrowers see little difference between a mortgage from one bank to another and it's increasingly easy for borrowers to switch lenders. This stems from a combination of better technology, ongoing competition and brokers' incentive to have borrowers refinance their mortgages. Price consequently becomes the determining factor in winning new business.
Brokers can improve price transparency, but they add to the mortgage origination cost. They slash the profit margin on mortgage products; sometimes by as much as 40 basis points (bps). In its half-year results presentation for fiscal 2025 (ended Dec. 31, 2024), Commonwealth Bank of Australia estimated that broker-originated home loans in Australia are typically 20%-30% less profitable than proprietary business.
In many cases--especially over the past three years--even the largest Australian banks have struggled at times to write new mortgage business with sufficient returns to cover their cost of capital.
We don't think easing monetary settings will help either. As the Reserve Bank of Australia continues to ease interest rates over the next 12-24 months, we believe the government will pressure banks to pass on rate cuts to borrowers in full. For this reason, it's unlikely banks will risk skimming any extra margin on mortgage products by withholding some of the rate cut benefit from customers. Those that dare, risk a political and consumer backlash, which could dent their reputation and customer loyalty (see "Australian Banks To Fall Under The Political Microscope," published on RatingsDirect, March 11, 2025).
Mortgage Brokers: A Product Of The Banks' Own Making
Australian retail banks have traditionally acted as both manufacturer and distributor of their products. Until the advent of online banking in the 1990s, the loan application process was an administratively laborious in-person experience. By distributing products in-house, banks operated on their own terms. Being transparent on price wasn't necessary.
Mortgage brokers emerged in the early 1990s. Regional banks and non-bank lenders initially used them to help build market share and diversify their balance sheets into new geographies. While no official records exist, we estimate brokers comprised less than 20% of banks' new lending before the turn of the century.
Fast forward 25 years. Intense competition for market share transformed brokers into the primary mortgage distributor for almost every Australian bank. In the 12 months to Dec. 31, 2024, the major banks collectively wrote almost 60% of their new lending via brokers.
This has loosened the link between bank and borrower. Brokers act as financial intermediaries that match customers to potential lenders, offering an end-to-end service at loan initiation. Borrowers also see little difference between a mortgage from one bank to another and the ability to switch lenders has become much easier. This has substantially eroded brand loyalty among Australian borrowers and somewhat relegated banks to mere suppliers of capital.
Back in 2000, brokers allowed banks to cut back on overheads from employing in-house bankers and operating large branch networks. They also allowed smaller regional banks to reach new customers in different regions. But by failing to reward loyalty with better value products and easier service, banks inadvertently pushed a generation of borrowers to brokers.
This became apparent through 2019-2022 when interest rates were near-zero. Through this period, Australian banks did a record amount of fixed rate lending, leading to an accumulation of very cheap fixed-rate mortgages on their balance sheets. This ignited a refinancing boom through 2023-2024 as borrowers rolled onto much higher rates, squeezing household cash flows. If a bank didn't offer a competitive rate, many borrowers resorted to brokers to find them a better one.
Transparent Pricing Banks' Best Shot To Cut Out The Middleman
Headline mortgage rates offered on bank websites are seldom those that borrowers actually pay. Most banks are willing to negotiate discounts with borrowers to win their business. But this takes time and can compel a borrower to seek a broker to facilitate the process.
The use of discretionary discounts creates confusion between lenders and borrowers about how prices are determined. The central bank says that banks may discount to reflect a lower risk on a given loan, to capture a loan of a large size, or simply to head off a competing offer from another lender.
In November 2020, the Australian Competition and Consumer Commission found a lack of easily accessible, transparent pricing information prevented borrowers from switching lenders or home loans, and thereby a chance to minimize their costs.
The intricacy and opacity of banks' pricing structures also makes it difficult for borrowers to compare lenders. Banks offer a mix of fixed, variable, and packaged loan products. These can have different features, fees, discount tiers, and potential cashback offers. This further obscures the true cost of borrowing and increases the appeal of brokers.
Can The Banks Rekindle Lost Loyalties?
If banks want to jump the middleman, customer behavior will need to shift dramatically. We believe pricing transparency is key. Most borrowers prefer brokers because they simplify the loan application and approval processes. They also have a clearer view of actual market pricing than what banks advertise.
Signs of rebellion are emerging. Most Australian banks now see sales channels differently. For National Australia Bank Ltd., growth in its proprietary home-lending channel is now a key strategic priority, according to the bank's half-year results presentation for fiscal 2025 (ended March 31, 2025).
While all banks are heavily investing in their proprietary channels to attract customers, we believe Commonwealth Bank--the largest Australian lender--has the best shot at meaningfully shifting its originations mix back to in-house channels. This is because it has the dominant proprietary lending channel in the Australian market, having written more than 45% of all non-broker originated loans in the three months to Sept. 30, 2024.
Some Australian banks are also implementing differential pricing between their third-party and proprietary channels. But doing this sustainably can become difficult. While some push in and out of different channels over time, supply-demand dynamics ultimately prevail. Brokers are so well embedded in the mortgage market that if a bank's pricing isn't competitive, brokers are unlikely to direct business their way.
Streamlined Digital Channels: A Way To Regain Ground
Banks know that to win over customers, proprietary channels must be fast, simple, and offer the best rate upfront. Digital lending has proven to be a key opportunity to erode mortgage brokers dominance. As customers become more tech-savvy, virtually every Australian bank has invested heavily in a digital loan proposition.
We anticipate that the use of AI will help banks to progressively level the playing field with brokers. Large banks have big capital expenditure budgets and are investing heavily in technologies that could slash costs and improve speed to market, ultimately leading to a better customer experience.
That said, we expect the shift to digital platforms will be gradual. Banks are still in the stage of modernizing their digital platforms while working to meet various compliance obligations. These can include identification-verification capabilities and adherence to anti-money laundering rules, credit laws, and responsible lending standards.
Approaches among banks vary. Given their dominant market positions and deep pockets, the four major banks have great influence over the development of digital mortgage products. All four are investing in long-term tech infrastructure upgrades to support their own digital products.
A notable example is Commonwealth Bank's Unloan, an end-to-end digital mortgage-lending channel that offers a small set of simple mortgage products. A fully digital service of this sort allows the bank to pass on the savings from the lower acquisition costs to borrowers. This means Unloan products are also usually among the cheapest in market.
By digitizing and automating key stages of the origination process, like credit assessments and document verification, banks can cut application wait times to hours, or even minutes. Digital loan processing also allows banks to embed these products into a wider range of online products. Banks have found that if borrowers engage with multiple banking products, it can boost customer loyalty.
Neutral Impact On Ratings For Now
Whether the move to bypass brokers materially improves bank profitability or simply redistributes costs remains to be seen. For now, the impact on our bank ratings is likely neutral, but success in lowering acquisition costs and boosting customer retention could support earnings stability--a credit positive.
Editor: Lex Hall
Related Research
- Australian Banks To Fall Under The Political Microscope, March 11, 2025
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