Building on history

by Melanie Mingas23 Apr 2019

Murray Cowan, founder and MD of Better Mortgage Management, explains how an appetite for innovation inspired a solution-driven customer proposition

When Better Mortgage Management opened its doors on 1 November 1999 the aim was to address gaps in the market that the banks couldn’t, providing innovative loan products for everyday Australians.

In short, the proposition was better service, better loans and better rates, all delivered through the third party channel.

The idea was spearheaded by Murray Cowan, who, fresh from a career in banking, was keen to apply the lessons he had learned at an international corporate to a new venture. “I was at Citibank for 10 years, and as an American bank that at the time was new to Australia, it was very innovative.

They encouraged new ideas and new ways of thinking and they brought innovation to the Australian lending market during very conservative times,” says Cowan, the company’s founder and MD.

“They brought new loans to market such as Mortgage Power and Home Credit, they were the first to promote fixed rates for home loans, they did investment loans at the same rate as home loans, and it was the first bank where depositors were paid interest based on daily balances as opposed to the then norm of the minimum monthly balance.

“It was a great place to work and I learned a lot of things, as well as good ideas and that started a culture for innovation.” In its first eight years of operations, the Better Mortgage Management loan book grew strongly. Then the GFC hit.

While the bigger banks dodged the worst of the crisis due to federal government support, it took smaller and nonbank lenders back to square one. Not only were customers flocking to the major institutions for their perceived security, but those lenders that were not as major suffered as funding costs skyrocketed.

For Better Mortgage Management – and the hundreds of other businesses playing in the same space – the effect was a hit to the loan book as well as margins, and unavoidably higher rates.

“Brokers should be prepared to try some alternative lenders; we lost market share after the GFC but are now staging a comeback” Murray Cowan, founder and MD, Better Mortgage Management

“The GFC years were very tough. We were a bigger business before the GFC, and we probably made more margin. Today, the book is now getting back to where it was, but margins remain tighter across our sector,” says Cowan. Non-banks were closely regulated post-GFC, but today, in a post-royal commission industry, the pendulum is swinging in the opposite direction. The reputations of many major financial institutions are diminished, and customers are turning their backs on scandal-hit brands and businesses while those same businesses retreat from entire sectors of the market.

“In recent times the royal commission has demonstrated that the big banks were getting a little bit reckless and needed to be brought back in line. Now the big banks are moving away from market niches that may be considered not their speciality,” Cowan says.

Among those areas are alt-doc lending, SMSF loans, investment and business lending, to name a few.

Better Mortgage Management has made a pledge to not only meet the demand for these products but also to innovate on their delivery, and for Cowan there’s a simple formula: compete by providing solutions, not on rate.

Across its product suite, Better Mortgage Management lends to homeowners, investors, expats and non-residents, among others, offering terms up to 30 years and interest-only periods of up to five years, with no ongoing reviews.

Additionally, there is a wide range of alt-doc options with rates starting from 4.69%. As is the nature of the sector, there is no credit scoring, meaning decisions are flexible as a result.

Changing times

From day one, Better Mortgage Management was built exclusively on a broker distribution model. Twenty years on and third party remains the only channel utilised by the firm, but the channel itself has evolved significantly. The MFAA calculates that there are currently more than 16,000 residential mortgage brokers alone, up from around 9,500 in 2008.

While good news for the sector, this influx of new-to-industry brokers means many haven’t lived through the same challenges as their more experienced peers. Another priority is diversification – not just of skills but of the types of lenders brokers partner with; in the modern finance system, minimising risk is imperative.

The ability to identify alt-doc customers is also high on the list, and Better Mortgage Management runs workshops to support brokers when dealing with non-vanilla borrowers.

“Brokers should be prepared to try some alternative lenders; we lost market share after the GFC but are now staging a comeback.

“Technology can play a big part in changing things, but exactly how far that goes and how far it reaches time will tell” Murray Cowan, founder and MD, Better Mortgage Management

“What banks could do, say, three years ago was quite broad, but that has become narrowed, so keep non-banks in mind for opportunities for those customers who now fall outside the bank guidelines, such as alt-doc, investment lending, customers with credit issues and SMSF,” Cowan advises.

Today, with more than 50 products on offer, BMM’s book is back to its pre-GFC values and gaining strength, due to diversified funding sources and a more robust marketplace.

However, the size and shape of the Australian finance industry has changed forever. Customers are now losing faith in the major financial brands, turning instead to challenger, neo and digital banks as well as other non-major lenders.

Keen to protect their market share, the established institutions are quietly snapping up their smaller competitors, creating a consolidated market in which competition isn’t as strong as it appears. “There have been a lot of mergers in our sector, as well as buyouts. Companies like RAMS and Wizard were bought out by Westpac and CBA. Then firms like Aussie Home Loans adapted from a mortgage manager to a broker group while retaining the mortgage management business. Recently other mortgage managers have been bought out and some changed business models,” Cowan recalls.

Cowan says the next big trend could be a continuation of recent merger and acquisition activity but with a modern-day twist.

“Some of the banks may cherrypick some of the best business models amongst the fintechs and purchase or invest in them. They have the substantial cash reserves and balance sheets to enable them to do that,” he says.

“There is probably scope for fintechs and perhaps digital banks to grow, and probably a lot of the incumbents may have seen opportunities. Technology can play a big part in changing things, but exactly how far that goes and how far it reaches time will tell.”

With the majors continuing to lose market share, the role of the non-bank lenders is expanding in a fluid and ever-changing industry, and the opportunities for brokers are multiplying as a result. Far from the last year being a negative for the third party channel, Cowan maintains that now is the time to shine.

“If brokers promote lesser known brands to their customer base, they might just discover that customers are happy to give them a try particularly now that some of the larger banks have had negative findings from the royal commission,” Cowan says.