Mortgage market more competitive but pressures build

Smaller lenders took some share away from the big banks in the mortgage market last year, thanks to more favourable funding conditions and investment in broker distribution, but it remains to be seen if they can maintain this higher share.

According to the latest Deloitte Australian Mortgage Report, the majors' mortgage share fell below 70 per cent last year - the lowest level since the financial crisis.

The cost of securitised asset finance fell to a level that allowed a number of small lenders to re-enter the residential mortgage-backed securities market and raise funds for mortgage lending. RMBS issuance last year was at its highest level since 2007.

Regional banks and credit unions put more resources into working with brokers - sharpening product pricing and commission rates, bulking up their back-office processing facilities and hiring more business development managers to work with brokers.

Deloitte's banking partners said the small lenders would have to work hard to hold on to their market share gains.

RMBS pricing reached a low in August last and issuers are paying ten or 15 basis points or more for funds now.

Deloitte banking partner Graham Mott said the increase in the cost of RMBS over the past six months was "not immaterial" and lenders would have to consider how much margin they were prepared to give up to remain competitive.

On the broker distribution side, several small lenders reported half-year results that showed an increase in sales through brokers. But in most cases higher sales through brokers came at the cost of lower margins and higher costs.

Deloitte banking partner James Hickey said: "They have incurred costs but they will be looking to get those costs back down once they have got their broker relationships established.

"You have to spend money to make that channel work but they are aiming to maintain broker distribution in a more cost-effective way."

Hickey said lenders and brokers faced further cost pressure as they invested to meet consumer demand for "omni-channel" distribution. Customers expect to be able to switch between the branch, online, the call centre and the broker as and when they like, and lenders and brokers have to make sure that process works seamlessly.

"The industry is aware that consumers are better informed about the mortgage market than in the past, thanks to online searching, and the challenge is to facilitate the technology-enabled banking that people increasingly want to do," Hickey said.