Commission changes could hammer mortgage franchise

If lenders opt to pay lower commissions, one major franchise could be heavily impacted due to its remuneration model

Commission changes could hammer mortgage franchise



Future decisions to decrease broker commissions have analysts predicting a negative impact on mortgage franchises such as Mortgage Choice.

A research note released by investment research firm Morningstar looked at the headwinds facing Mortgage Choice and determined that although the firm is performing well now, potential changes to the broker commission model could lead to several detrimental effects.

Mortgage Choice currently pays franchisees 73% of upfront and 61% of trail received from lenders, putting it in a good position to pass on the negative impact of lower commission rates to franchise owners, analysts said.

However, despite the company’s strong market presence, it has been losing market share of the mortgage broker segment as smaller players take a cut of the commission themselves. This could lead to higher turnover for those with the firm.

“Commission cuts from banks could encourage more franchisees to look for a better deal outside the Mortgage Choice franchise model,” analysts said. This trend may also have the same effect on other mortgage franchises around Australia.

A downturn in the national housing market could also produce lower returns for Mortgage Choice over the long term, Morningstar predicted.

“Future profitability relies heavily on the ongoing strength of the Australian housing market and the preparedness of the four major banks to continue using mortgage brokers to distribute mortgages and continue to pay current levels of upfront commissions.”

In the event that housing finance approvals decrease in a downturn, Morningstar analysts predict Mortgage Choice’s upfront commission income will be affected.

Upfront accounted for 45% (or $39m) of gross broker commission income, while trail accounted for the remaining 55% (or $48m) in the first half of the 2017 financial year.

Finally, Mortgage Choice is subject to regulatory changes by the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) both of which may affect the firm’s ability to grow, analysts said.

“ASIC’s review into broker remuneration could result in regulatory changes requiring a rebasing and/or reduction in the current commission structure, and if lenders reduce commission rates or negatively alter commission structures, Mortgage Choice’s revenue and profitability would be under pressure.”

However, despite these potential risks, analysts said the franchise was still financially sound in the present. As well as the high levels of expertise amongst the board and senior management, Mortgage Choice’s strategy to diversify into financial advice has also been effective at raising revenue.

“The business has consistently delivered on its strategy and business targets and we expect more of the same in the future.”

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