Changing broker business model appeals to lenders

The image of mortgage brokers as salesmen keen to attract price-sensitive borrowers and churn them as often as possible is out of date, according to research by Ernst & Young.

EY found that the broker business model had evolved over the past decade from one based on high transaction volumes and upfront commissions to one that was more focused on managing ongoing customer relationships.

The reason for the change is that many brokers have built large back books, which generate significant trail commissions, shifting the focus to the management of an established customer base.

"Today brokers use a relationship model, focusing on cultivating their large back books by working on customer retention," EY said.

This shift has reinforced the strategic importance of brokers to lenders. Brokers work with financial institutions to service existing customers by offering other products.

According to EY, lenders recognise that a core competency of brokers is managing customer relationships.

Lenders said they were working with brokers to retain customers, where once they would have suspected them of wanting to churn the business.

EY found that some lenders were increasing their trails over time to reward loyalty.

There are other reasons lenders are doing more business with brokers. The quality of applications submitted by brokers is high, in a majority of cases, and improving.

Lenders said they had observed over time that there was no material difference in the tenure of customers coming through brokers and those coming through proprietary channels.

And lenders are aware that customers are increasingly willing to talk to brokers about other products, such insurance and credit cards, opening up cross-sell opportunities.