REA Group has cut the valuation of trail commissions in its mortgage broking business to reflect higher mortgage runoff rates and higher broker payout ratios.
REA subsidiary Mortgage Choice operates a network of more than 1000 brokers. REA acquired Mortgage Choice in July last year and merged it with its Smartline business to form the core of its financial services division.
It released its 2021/22 financial report yesterday and for the financial services division it reported on a pro forma basis, assuming that Mortgage Choice was a part of the company throughout the whole of the 2020/21 financial year.
On that basis, settlements rose 28 per cent from A$20 billion in 2020/21 to 25.5 billion in the year to June. The value of the loan book grew 3 per cent to $87.6 billion.
Broker numbers grew from 945 in 2020/21 to 1002 in 2021/22. The company said it added 18 new brokers in July.
The division’s operating revenue rose 12 per cent to $79 million but after accounting for a $13 million reduction in the valuation of the trail commission and higher broker payouts, net revenue fell 2 per cent to $66 million.
The assumption for the weighted average loan life used to value the trail commission fell from 4.2 years in 2020/21 to 4.1 years in 2021/22. The average percentage paid to franchisees rose from 75.4 per cent to 78 per cent.
REA Group chief executive Owen Wilson said the runoff rate had increased because of high levels of borrower prepayments and a pick-up in refinancing.
Wilson said the integration of Mortgage Choice was “progressing well” and was expected to be completed by the March quarter next year.
REA Group’s core business is online advertising for residential property sales and rentals, and related services such as property market data. It claims to operate the biggest property site in Australia with 12.7 million unique visitors each month.
Website searches generate leads, which are fed through to the brokers. Wilson said REA is working on enhancements to this process, including a concierge service to better manage broker introductions.
He expects that better lead generation will offset any softening in the mortgage market in the year ahead.
He expects property sales listings to be down in 2022/23 but market conditions will still be good.