I am referring to the size of mortgage brokerage firms. And I guess the answer always depend on which side of the aisle you are standing. If you work for a big firm you would say yes it does. But if you are a boutique mortgage consultancy firm like us, you would not think so.
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At MortgageWise, we don’t just look at things on the surface when they say “the bigger, the better”. Much like how we go about advising our clients – we focus on building that long-term trust and not just do the “easy sell”. For example, we don’t just recommend fixed rates because that’s what most people ask for now, or get HDB clients to take a 5-year fixed rate knowing that’s like a “walk over”, when you are coming from a 2.60% HDB loan. We need to go beyond and look at what the interest rate cycle is telling us.
After reading a recent blog post (with some amusement) from a sizeable competitor on how size is one of “8 ways to spot a lousy mortgage broker”, I decide to tackle the question head on – does size really matter? But in so doing, I have to go to great lengths to first explain the dynamics of how this industry (mortgage brokerage) works. It may well be a worthwhile read. Clients will better appreciate the work we do as mortgage professionals and decide if they want to seek out such a partnership – someone trusted to watch your back when interest rate creeps up.
How are mortgage brokers remunerated?
From what I understand, the industry started in early 2000s with banks giving incentive to property agents – the first point of contact for a property deal, before you can get to mortgages. The intention is pure and simple – agents get paid “extra” for recommending bank loans to buyers. But this is also where the problem started. Agents’ primary focus is on selling properties. The referral fees paid by banks are small beer when compared to the tens of thousands in commissions they raked in closing a property deal. They are not interested to spend time researching and recommending truly the best home loan rates to clients, much less advising them how to choose between fixed or floating, or what else to consider in a home loan. The end result: agents conveniently “sending” different bankers in hope customers will sign with anyone of them and they get paid “a bonus” – which is really what it is for agents.
Such inefficiencies herald the need for a better way of “comparing and recommending mortgages”. With advent of internet by mid-2000, it ushered in the era of mortgage rates comparison sites and the dawn of mortgage brokerage industry. Banks extend the concept of paying a referral fee to anyone who can introduce a new mortgage client to the bank, be it refinancing or a new purchase loan. Why keep it to just the agents? In fact, re-mortgaging or refinancing proves to be staple business for many years until more recently (purchases overtook refinancing since covid hit). It’s a much bigger pie to share around.
In theory, banks are supposed to build in this referral fee into their marketing cost structure – it’s an acquisition cost to bring in a new customer to the bank. Naturally it eats into profit margin but it is no different from banks paying internal commissions on various packages to their own mortgage specialists. However, when an external broker is involved, the bank simply pays less commissions internally as there’s an added cost to be paid out, in order to offer the same interest rate to the customer.
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Do banks offer better rates to “bigger” broker firms (and their clients)?
The short answer is no, as far as we know. Let us know otherwise, we will be surprised. We are paid a standard referral fee in the industry for all home loan packages. And rightfully so. Brokers can then truly focus on recommending the right package to the client based on his needs and objective, and not on which package is the more profitable.
The long answer is still no. Let me explain.
In our seven years of operations since 2014, there’s only one occasion I remember where one bank offers a special rate to a select group of 10 brokers we were told. This is on account of them being the top 10 brokers who refer the most businesses to the bank in the past year. Is it some special home loan rate to shout about? No. Because it’s the same “direct-to-bank” rate that the bank is offering on its website available to the public (in which case we would have informed our clients). And it’s a rate that other banks are pretty much able to match after a while, as always.
This episode highlights the dilemma for banks – is there a need to incentivise brokers who are already referring a lot of business to the bank? Put it another way, if a particular home loan package is selling like hotcakes because of “unrivalled low rates” in the market, the bank would certainly baulk at the need to discount the rate further for select brokers especially big-volume ones. That means cutting margin even further, across the board and unnecessarily. In fact, if a broker does “pump” a lot of cases to a particular lender, it is not unexpected they would ask for higher referral fees for themselves instead of lower rates. Which also means – caveats emptor, be careful if some brokers keep coming back to a particular package.
There’s no free lunch. If the bank does lower the mortgage rate offered to one broker’s clients, it has to trade-off somewhere by cutting the broker’s referral fee, fully or partially. And such reduced fees happen all the time! Question: Is the broker you are working with showing you such home loan packages where fees are cut?
In fact, the more pertinent question you should be asking is the next one.
Do banks offer better rates if you apply to them direct?
If any bank contemplates offering a lower rate for select brokers’ clients, I put to you that it can’t be any lower than what they would offer to “direct-to-bank” customers. Because that’s the baseline in terms of costs – where the bank strips to the bare minimum all marketing and distribution costs to offer the lowest possible rate.
We have said earlier that in theory banks would factor in all marketing costs into their pricing model including referral fees paid to brokers. In reality, there’s always a temptation when margins are squeezed and banks start looking for places to cut. The axe will first fall on their internal commissions structure for mortgage specialists working in the bank (since they are paid basic salary and are expected to sell). Next, they will look to cut out broker’s referral fee if they can, and step up their own direct marketing costs and efforts.
Over the years we have seen some banks pivot away from using brokers for a period by offering lower direct rates. Soon, they realized no matter how low the rates they offer, another bank is going to come along and match it (that’s the beauty of free market as banks need to compete for business). Brokers who had been snubbed previously will then take all businesses away to these other banks until the referral fee is restored. We have seen this played out in various forms multiple times.
Whether banks could increase their market share by cutting out brokers as a distribution channel, and instead rely on increased google ad spend, cross-selling from the bank’s internal base, or any other marketing spend, is a topic of debate for another day. The important takeaway here is – if you work with a broker who understand the nature of free market competition and is 100% transparent about showing all available packages be it “broker packages” or “direct packages”, you will always get the best deal. That’s how we operate here at MortgageWise. And that’s also why we like clients to call the banks direct to validate it’s the same rate they are getting. But they get more benefits when they refinance through us with our rewards programme.
At the end of the day, we recognise that we are not the product owners, but merely distributors for the banks. We have to respect the banks’ right to price their product vis-à-vis competition. Our role is analyse and present all available home loan packages in the market place to our clients.
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Why do we choose to remain small?
There are definitely benefits in a bigger team like more business continuity and product diversity when a mortgage broker firm spins off into other related businesses. As the saying goes, there is strength in numbers.
However, it’s my belief that if you only want to master that one thing to perfection by practicing it for 10,000 hours – to become the best mortgage advisor to your clients, size or scale in operations is not a pre-requisite. In any advisory business, honesty and integrity trump scale in operations in my opinion. The only exception is when scale gives you access to more products in your suite to sell, for example property developers giving exclusive marketing rights to property agency with larger sales force.
On the contrary, scale in operations can sometimes become an impediment. There’s a reason why we choose to remain a small boutique firm – we are in what I call a “flimsy” industry as middleman for mortgages. This is because we can put in 101% effort to deliver the best service experience for our clients, but our paymaster is not the client. It’s the product owners – the banks. This is the same situation faced by banks’ wealth managers (RMs, private bankers) and financial advisors for years which remain unresolved. Depending on which endowment scheme or asset class (like Universal Life) pays the most commissions, or which one is there a target to meet, advisors are forced to do product-peddling! There are improvements over the years where some banks adopt more “balanced scorecard” approach in sales remuneration. Still there’s no easy solution as it is hard to get clients in Singapore to pay for advisory service per se. Distributors like us need to get remuneration from product owners and hence answerable for product targets.
Because of such flimsy nature of the business, a big mortgage brokerage firm with high fixed costs or overheads might find itself “trapped” and unable to advise impartially when more banks resort to launch direct packages and cut out brokers from time to time. At MortgageWise, our small team by design free us from such constraints as we are not worried about “not closing a deal” today.
In fact, with a relentless focus on doing all things mortgages and mortgages only, be it residential, commercial property loan under company or personal name, or overseas property financing (UK and Australia), we are able to roll out innovative programmes for our clients over the years:
- Rewards programme of $150/200 FairPrice gift card (for refinancing/purchase) – just a small token gift to appreciate clients who decide to take the loan through us rather than direct (since 2014)
- Referral (or Member-get-Member) programme where existing clients keep receiving a $50 FairPrice gift card couriered to their doorstep whenever they refer their friends or family members to us successfully (since 2014)
- Letter of Guarantee for $1,000 Refund programme for buyers of new launches or under-construction properties (launched in Jun 2021)
Don’t get me wrong. I’m not saying a big-sized mortgage broker firm can’t be honest in its dealings. Remember, whether you choose to work with a big mortgage broker or a smaller one for your home loan, you are still dealing with one person. Your service experience good or bad, will largely depend on the professionalism, knowledge, service mindset, and last but not least the integrity and honesty of this sales person you encounter. Both consultants (from big and small firm) can deliver on all of that when there’s proper training, systems, processes, values and culture put in place by the company. I’m simply saying this – scale in operations has got nothing to do with all that, other than cost efficiencies.
Unless a company with big operations is able to leverage on its scale to deliver unique programmes, pass on cost efficiencies (e.g. lower rates subsidized by the broker), or translate that scale into some meaningful benefits in a personal way to its clientele base, there is no real value to clients for being – just big.
So, does size really matter? I leave that for you to ponder.
Your service experience good or bad, will largely depend on the professionalism, knowledge, service mindset, and last but not least the integrity and honesty of this sales person you encounter. Scale in operations has got nothing to do with all that.
Compare Singapore home loan rates using a comprehensive, fast and free service from MortgageWise.sg, in operations since 2014. Be it to refinance home loan, buy your next Singapore condo , or even explore commercial property loan, speak to our dedicated team of mortgage consultants at your service today!