Amid some of the struggles of today’s market, it can be easy to forget how far the intermediary sector has come.
Back in 2014, brokers held only a 61.9% share of mortgage distribution, up from a low of 47% in 2012.
Looking ahead to 2024, the Intermediary Mortgage Lenders Association (Imla) predicts that 90% of all mortgage business will be conducted through brokers.
The more complex borrower needs become, the more brokers will be needed
In many ways, brokers have defied the odds to solidify their position in the mortgage market, with the emergence of online offerings and direct competition from lenders over the years.
What has caused this shift, and how can brokers maintain their share in the face of the current market challenges and the increased popularity of product transfers?
Changing attitudes
In the past 15 years, the periods when brokers have gained traction have generally been the result of one of two factors: turbulent economic conditions or increased distribution from lenders.
“Initially, a lack of liquidity following the financial crisis drove lenders towards the direct route and dual pricing,” explains London & Country associate director of communications David Hollingworth.
In the current environment, where borrowers have more questions than answers, brokers can help explain the pros and cons
“However, this approach didn’t last long as lenders realised intermediaries offered a more efficient way to distribute and grow. That has only been reinforced since then.”
The 2014 Mortgage Market Review also made it harder for lenders to offer products directly.
“During those initial phases, reports emerged of lender meetings with borrowers lasting up to three hours. Overall, lenders recognised that brokers were better positioned to offer advice right from the start,” adds Hollingworth.
Although some lenders intentionally chose the intermediary route, other changes unfolded more incidentally.
“Very few mortgage advisers remain directly employed by lenders,” says Association of Mortgage Intermediaries (Ami) chief executive Robert Sinclair.
Do I believe intermediation will reduce? No. Could the shape of the intermediary market shift? Yes
“Additionally, more challenger lenders are exclusively intermediated.
“Naturally, brokers’ market share has grown as lenders have closed branches, which means, if you want to get a mortgage/remortgage, there are fewer people to do that in the direct space,” adds Sinclair.
Imla executive director Kate Davies points out that, from lenders’ point of view, the lower fixed costs and flexibility in controlling volumes through the broker channel have contributed to the growing intermediary share.
“Lender competition has driven greater product choice, which is good news for borrowers but means they increasingly need expert advice to identify the most suitable mortgage for their needs,” she says.
“Borrowers’ personal circumstances are also increasingly complex. More people these days are self-employed or have multiple income streams; some have had jobs or businesses disrupted by Covid; and others are struggling with post-Covid health issues or failed relationships — all of which impact their financial situation and can require professional guidance,” she adds.
The economy is likely to remain challenging for some time, driving more borrowers to seek intermediaries’ help
Brightstar Financial managing director Bradley Moore observes that recent events such as the pandemic and the cost-of-living crisis have amplified the number of customers with complex circumstances.
“This has driven a rise in customers with missed credit payments or those who have more complex affordability requirements — such as multiple sources of income from working more than one job, or self-employed customers who want to use their most recent years’ figures,” he says.
The cumulative effect of these trends, Moore highlights, is that professional advice and access to specialist lenders is more crucial than ever for both borrowers and brokers.
Product transfers
Although a 90% broker market share is impressive, this figure overlooks a crucial aspect of the market: product transfers.
In recent months, product transfers have become increasingly popular, with several lenders offering more competitive rates for them compared to new business. Affordability challenges faced by some borrowers have also fuelled their popularity.
“Brokers’ share of the product transfer market used to be around 20% to 25%,” notes Sinclair. “Now that figure has risen closer to 40%.”
Lender competition has driven greater product choice, which is good news for borrowers but means they increasingly need expert advice
As the popularity of these products has grown, so has concern over the procuration fees brokers receive.
Hollingworth explains that, although it is a notable improvement that some lenders are offering half the usual fee for a product transfer, this still falls short.
“Certain lenders assume the process should be easier and quicker. However, from a broker’s perspective, the full advice process is still followed,” he says. “Talk of partnership is ever present, and a full proc fee would be a way for lenders to acknowledge this in the current climate.”
Brokers need to emphasise that, even if their client thinks a product transfer is the best choice, nevertheless they should seek advice and compare it to other market options, adds Hollingworth.
Sinclair believes the product transfer market is an area where, potentially, brokers could lose market share to lender technology.
“An increasing number of lenders are developing technology to simplify the process of switching to a new product,” he says.
I do wonder how the market would operate if every lender began moving towards individualised pricing
“All it takes is a letter to the customer explaining that they are coming to the end of their deal, what their options are and that they can go online and move to the product with just three clicks.”
Sinclair notes that, although the use of such technology was already standard practice for some lenders, it is becoming increasingly common.
“If we rewind two years, very few building societies had this technology in place. But now most of them are building it,” he observes.
Technology: Help or hindrance?
Beyond product transfers, the most significant and apparent threat to brokers’ market share stems from the emergence of new technology across the board.
Although past predictions regarding the rise of technology have not fully materialised, the arrival of artificial intelligence (AI) could affect the intermediary sector in multiple ways.
“Do I believe intermediation will reduce? No,” states Sinclair. “Could the shape of the intermediary market shift? Yes.”
Borrowers’ personal circumstances are increasingly complex
He continues: “Bigger firms are exploring how they can use technology to help their discussions with the customer and speed up the process.”
As these firms gradually implement more technology, says Sinclair, this could result in a reduced workforce.
Although concerns about AI’s impact on brokers have been voiced, the intricate nature of certain borrowers’ circumstances should alleviate this concern, for now at least.
“I don’t believe AI poses a threat to brokers. In fact, the more complex borrower needs become, the more the need for brokers will be evident,” argues Davies.
“The economy is likely to remain challenging for some time, driving more borrowers to seek intermediaries’ help in finding ways to spread their costs, extend mortgage terms, switch to interest-only arrangements and so forth,” she adds.
Very few mortgage advisers remain directly employed by lenders
Hollingworth points out that much of the talk about online advice in the past emerged during periods when borrowers had a clear path with a sustained low base rate.
“In the current environment, where borrowers have more questions than answers, brokers can help explain the pros and cons of fixed or variable options,” he says.
“If we consider the buy-to-let market and how rapidly it has transformed due to higher rates, there will likely now be only a very small cohort who are going direct.”
Open Banking represents another major technological development, potentially paving the way for a more personalised approach from lenders.
“I do wonder how the market would operate if every lender began moving towards individualised pricing,” says Hollingworth.
Lenders recognised that brokers were better positioned to offer advice from the start
“While this isn’t something that would happen quickly, it remains a possibility.”
Nonetheless, such a shift would continue to leave a clear role for brokers when comparing products, he adds.
Consistent communication
With 86% of borrowers in 2023 estimated to have used a broker, theoretically this should help sustain brokers’ market share for the foreseeable future.
Nurturing positive customer relationships and maintaining consistent communication can play a pivotal role, says Sinclair.
“If, however, you expect to be able to ignore them for five years and then, six months before their fixed rate ends, be able to send a letter and have them suddenly want to talk to you, I’m not sure it works,” he says.
Sinclair highlights the various routes for brokers to stay connected with clients: email, social media or a simple phone call.
Naturally, brokers’ market share has grown as lenders have closed branches
Regarding future expansion, he notes: “It’s all about building trusted lead sources. If you’re not going to purchase leads online, the alternative is partnering with professionals.
“Convincing estate agents, accountants or law firms that you’re the best partner necessitates demonstrating professionalism, and understanding their businesses and motivations.”
Threats to brokers’ market share will always exist but, in Sinclair’s opinion, the most effective way to retain that share is also one of the simplest: “I still maintain the best lead source is a satisfied customer.”
What’s behind the mortgage broker market boom?
Jonathan Samuels, chief executive office of Octane Capital
Recently, our research revealed that the size of the mortgage broker market was set to climb to almost £1.93bn in 2023 — a year-on-year rise of 2.6%.
This growth follows a 9.6% jump between 2021 and 2022, which was the third-largest annual increase of the past decade.
What’s more, the mortgage broker market has grown in each of the past 10 years. So what’s the industry’s secret?
Ensure there is always a professional human element to your offering
For lenders, brokers offer lower fixed costs and the flexibility to control volumes. For the consumer, a broker is beneficial because they often give a whole-of-market view and can advise on the best products.
Often, brokers are quicker to deal with, too, which resonates; but the consumer has also embraced the availability of digital services in recent years, which has benefited remote advisers greatly.
Speed, cost, flexibility and technology are all helping to drive the mortgage broker market forward, but at the heart of their offering remains one aspect that has always held appeal: the ability to provide a human element in the form of one-to-one advice.
How can brokers stay competitive? Agility and evolution are always key
Before the recent booms of the property market came the financial crisis of 2008–09 and this was perhaps the key turning point for the mortgage broker market. Following this market downturn, consumers looked for more advice when borrowing so they could make an informed decision, and this is where the broker sector came into its own.
However, while the future certainly looks bright, it’s not without dark clouds. The rapid emergence of AI and the potential to fully digitise the brokering process could be a real danger to the sector.
More immediately, current inflation and its stubborn refusal to fall will ultimately be a key factor in determining the future health of the mortgage sector. Also, if interest rates remain high, we can expect to see a fall in gross mortgage lending.
For the consumer, a broker is beneficial because they often give a whole-of-market view
So, how can brokers stay competitive? Agility and evolution are always key. Seek out opportunities to upskill in order to stand out from the rest. Leverage new technology to further improve your proposition, and invest in your marketing and PR presence to proactively reach your audience.
Most importantly, invest in people, internally and externally. Build long-term relationships and ensure there is always a professional human element to your offering that can provide the advice and guidance that ultimately will bring borrowers to your door.
This article featured in the September 2023 edition of MS.
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