MORTGAGE BROKING

Operating a Mortgage Broking

Business
BY PETER ANDREWS, MBA, CPA, B.ECONOMICS, B.ARTS
Former lecturer at Macquarie University

M
ortgage brokers are becoming the number one choice for
consumers who are seeking a home loan or to refinance their
existing loan. They work with clients to determine their
borrowing needs and ability, select a loan suited to their circumstances
and manage the process through to settlement. This requires a
relationship with a mortgage aggregator to provide access to lenders as
well as a close working knowledge of the lending products the aggregator
is able to provide.
Working as a mortgage broker, however, involves more than technical
knowledge and competence. Successful mortgage brokers have a solid
marketing program. They are also prepared to learn from others in the
industry.

Peter Andrews is a specialist trainer in

Financial Planning.
CONTENTS
INTRODUCTION TO MORTGAGE BROKING ...................................................2
After an early career in corporate finance THE FUNCTIONS OF A MORTGAGE BROKER .........................................................2
and banking, Peter became a lecturer at THE ADVANTAGES OF USING A MORTGAGE BROKER .............................................2
Macquarie University. THE ROLE OF AGGREGATORS ............................................................................3
REQUIREMENTS TO BE A MORTGAGE BROKER .....................................................3
He has also taught in the Graduate
School of Management at the University
MORTGAGE BROKER TRAINING REQUIREMENTS ...................................................4
of Sydney and the School of Banking and HOW MORTGAGE BROKERS ARE PAID ................................................................4
Finance at the University of New South MORTGAGE LENDING BASICS........................................................................4
Wales.
BASIC TERMINOLOGY ......................................................................................4
Peter has a Bachelor of Arts and a
LOAN TO VALUE RATIO....................................................................................5
Bachelor of Economics from the LENDERS MORTGAGE INSURANCE......................................................................5
University of Sydney and a Master of ASSISTANCE TO FIRST HOME BUYERS .................................................................6
Business Administration from the
University of Florida. He is also a MORTGAGE LOAN PRODUCTS.......................................................................6
Certified Practicing Accountant. OTHER FORMS OF CONSUMER CREDIT .........................................................8
OTHER FINANCIAL SERVICES .......................................................................10
COMPARISON INTEREST RATES ...................................................................11
GROWING A MORTGAGE BROKING BUSINESS ............................................12
MARKET SEGMENTATION ..............................................................................12
DEVELOP STRATEGIES ....................................................................................13
PREPARE A POSITION STATEMENT ...................................................................13
PERFORM SITUATION ANALYSIS ......................................................................13
PROVIDE QUALITY SERVICE .............................................................................14
OBTAIN REFERRALS ......................................................................................14
REACHING OUT TO NEW CLIENTS ...................................................................14
APPROACHING CENTRES OF INFLUENCE ............................................................15
LEARNING FROM OTHER BROKERS ..................................................................15
SECURITY OF CLIENT RECORDS ....................................................................16
ACCESS TO CLIENT RECORDS ...........................................................................16
DISCLOSURE OF CLIENT INFORMATION ..............................................................16
ENVIRONMENT SUSTAINABILITY .................................................................16

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 2 3. MORTGAGE BROKING
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INTRODUCTION TO MORTGAGE
BROKING
Mortgage brokers began around twenty years ago and
are now involved in setting up 43% of home loans.
Membership of the peak professional body, the
Mortgage and Finance Association of Australia, was
12,553 in June 2014, with 5,740 separate mortgage
broking businesses.1
The industry thrived in the pre-GFC period through the
growth of securitisation. However, as Figure 1 indicates,
the securitised debt market has only been half its pre-
GFC level in recent years, and this has made it more
difficult for mortgage brokers to compete with the
major banks.
Figure 1: Australian Residential Mortgage-backed
Securities, May 2004 – April 20142
250.0
200.0
150.0
100.0
50.0
0.0
Sep-2007
Jan-2006
Jul-2008
Jan-2011
Sep-2012
Jul-2013
Nov-2006
Nov-2011
May-2004
May-2009
Mar-2005
Mar-2010
In its submission to the Financial System Inquiry (the
Murray Committee) the Mortgage and Finance
Association of Australia advocated the taking of steps to
revive the market for residential mortgage-backed
securities to enable mortgage brokers to compete more
effectively with the major banks once again. Its
argument for this approach was that this would bring
about a return to more innovative lending for housing
that would, amongst other things, assist first-time
homebuyers.
However, even with the reduced level of loan
securitisation, the mortgage broking industry is making
progress. For example, between 2009 and 2014,
industry revenue grew by an average of 4.1% a year. 3
1 Source: IBIS World report, June 2014
2 Source: RBA
3 Source: IBIS World report, June 2014
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THE FUNCTIONS OF A MORTGAGE
BROKER
The functions of a mortgage broker may be summarised
as:
 find a lender;
 complete the loan application; and
 submit the loan application to the bank or other
loan provider, and wait for them to approve it.
These services are provided without cost to the
borrower. As a general rule, a mortgage broker receives
a once-only upfront fee from the loan provider on
settlement of the loan and an ongoing ‘trail’ income (on
average 0.20% p.a.) until the loan is repaid in full.
Once the loan has settled, the broker has little more to
do with it, with the borrower’s on-going relationship
with the lender.
THE ADVANTAGES OF USING A
MORTGAGE BROKER
Five arguments can be put forward for using a qualified
mortgage broker when trying to obtain property
finance:
1. Choice
The biggest advantage of a broker over a bank or other
lender is choice. A client sitting in front of a broker is
sitting in front of 10+ banks and 50+ products as against
visiting a banker who has access to only one of the
bank’s products. This is more likely to lead to the most
suitable lending product being chosen. Also, now that
the banks are more cautious because of the responsible
lending provisions (discussed in a later chapter), there
may be increased likelihood of a successful outcome
with more specialised lending proposals such as loans
for borrowers with a low credit rating. This is because
mortgage brokers often become specialised in different
market segments, and in doing this they can predict the
probability of a successful outcome.
Prospective borrowers should therefore recognise what
services they need first and then look for an
experienced mortgage broker who can assist.
 3 3. MORTGAGE BROKING
3
2. Experience
Mortgage brokers often own their own businesses and
are committed to their clients in the long term, with
many years of industry experience. This contrasts with
bank staff, who may not be experienced with property
lending, and may be promoted away from their
customers.
3. Specialisation
Bank staff handling property loans normally do not have
specialised training and experience in one area.
Mortgage brokers can be chosen according to their
specialisation, such as investment property loans.
Another example of specialisation being important is
the area of lending to borrowers with a poor credit
history. Specialised mortgage brokers can provide
assistance that may not be available through a bank by
making a more careful credit appraisal and a more
successful packaging of the lending proposal.
Other areas of specialisation include ‘low doc’ loans for
the self-employed and ‘SMSF loans’ (investment loans
for self-managed superannuation funds).
4. Follow Up
Following up the progress of a loan application is time
consuming and frustrating. A good mortgage broker will
have a system for chasing the proposal up, keeping the
borrower informed and saving time.
5. Personal Banker
A mortgage broker is like ‘the perfect personal banker.’
This is because it is their own business and they are in
for the long haul. If they are successful in building a
relationship with their client, after facilitating a
borrower’s home loan they may then be available for
investment loans or specialised business finance and,
possible once again, further housing finance as their
clients upgrade.
This contrasts to the situation with banks, with staff
changes making it difficult to have continuing
relationships.
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THE ROLE OF AGGREGATORS
Mortgage brokers need to have access to a wide variety
of lenders and products. While many brokers maintain
direct accreditations with lenders, the major lenders
often have volume and compliance standards that a
broker might have difficulty in achieving by themselves.
For this reason, most brokers will use the services of an
aggregator (a wholesaler for the finance industry) in
order to have access to major lenders and maintain
their accreditations. There are over fifty mortgage
aggregators operating in Australia.
The aggregators come in various forms from discount
‘warehouses’ to fully branded franchise groups. All of
the aggregators offer additional services other than just
maintaining access to lenders. Some of the extra
services could possibly include: loan comparison
software, compliance support, Credit Licence support,
providing leads, customer relationship, administration,
training, mentoring and many other services. Most
aggregators also provide access to other non-finance
products services that their members can provide for
their clients in return for commissions or fees. Examples
of these products are commercial finance and insurance
products.
A list of aggregators affiliated with the Mortgage and
Finance Association of Australia may be found at:
http://www.mfaa.com.au/default.asp?artID=2028
REQUIREMENTS TO BE A MORTGAGE
BROKER
Australian Credit License
The National Consumer Credit Protection Act 2009
(NCCP Act) requires a mortgage broker to either hold an
Australian Credit Licence (ACL) or be authorised under a
licence (normally by the aggregator or the groups they
work with).
Before ASIC grants a credit licence, the applicant must
demonstrate adequate arrangements to:
 supervise and monitor the activities of any
representatives and ensure that any breaches are
identified and remedied; and
 ensure that any representatives are adequately
trained, and are competent, to engage in the credit
activities covered by the credit licence.
 4 3. MORTGAGE BROKING
4
An ACL holder must show its ACL number on prescribed
documents.4 Regulation 13 of the Regulations issued
under the NCCP Act prescribes the following
documents:
 The documents required by Chapter 3 of the NCCP
Act (Credit Guides, Quotes, and Proposal Disclosure
Documents).
 Printed advertisements that relate to the provision
of regulated credit.
 Documents required to be created, produced, given
or published under the National Credit Code5 (e.g.
NCC notices, credit contracts, mortgages,
guarantees).
 Documents lodged with ASIC that relate to the
provision of regulated credit.
Training Requirement
Brokers and their representatives are required by ASIC
to have completed a Certificate 4 in Financial Services –
Mortgage Finance.
Membership of a Professional Association
Although it is not a formal requirement, some credit
providers such as banks require mortgage brokers and
their representatives to be a member of a mortgage
industry professional association.
There are two mortgage industry
associations:
 the Mortgage and Finance Association of Australia
(MFAA); and
 the Finance Brokers Association of Australia (FBAA)
(The MFAA requires a Diploma in Financial Services
(Mortgage Management) for membership.)
Industry Knowledge
Although not specifically required by ASIC, a broker
needs knowledge of the industry. Some of this can be
obtained by talking to aggregators and other brokers.
Also, anyone intending to move into mortgage broking
needs to conduct research. This means reading as much
as possible about mortgages, sales, and finance. A good
starting point is the numerous publications such as Your
Mortgage Magazine, Mortgage Professional Australia,
and Australian Broker that are available from most
newsagents.
4 NCCP Act, s.51.
5 Schedule 1 of the NCCP Act.
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Another useful source of articles and video interviews is
Australian Broker Online, which may be found at:
http://www.brokernews.com.au
MORTGAGE BROKER TRAINING
REQUIREMENTS
ASIC requires credit licensees to conduct formal training
programs for their brokers. They must also have a
written policy regarding training, as well as maintain a
training register detailing the training undertaken by
each representative.6
HOW MORTGAGE BROKERS ARE PAID
Mortgage brokers are not paid directly by their clients.
Instead they receive commissions from the credit
provider they have selected in the form of:
 A front-end fee (i.e. a once-off payment when the
loan is taken out; and
 A ‘trail commission’, i.e. an annual fee from the
credit provider,
Typical fees in these forms are:
 Upfront fee: between 0.55% to 0.70% of the loan
amount
 Trail fee: from 0.00% to 0.275% of the loan amount
professional
Having fees paid by the credit provider may appear
convenient as far as the client is concerned, but it may
give rise to what lawyers call a ‘conflict of interest’ in
that it may cause brokers to lean towards the credit
provider that pays the highest fees. Although brokers
are required to disclose how they are remunerated,
they are not required to disclose the fees they receive
from different credit providers. Disclosure of fees from
individual credit providers is, however, a ‘best practice’
for brokers to follow.
MORTGAGE LENDING BASICS
BASIC TERMINOLOGY
There is some basic terminology that you should fix in
your mind at the outset in case you become confused
later on.
The word “mortgage” actually means “pledge”. With a
mortgage the borrower pledges to give the property to
6 ASIC Regulatory Guide 204.
 5 3. MORTGAGE BROKING
5
the borrower if the borrower cannot pay back the loan LENDERS MORTGAGE INSURANCE
in full.
An LVR of 80% is generally considered to be the ‘safe’
Now consider the distinction between “mortgagor”
limit, with lenders requiring Lenders Mortgage
and “mortgagee”. In English, the suffix (i.e. word
Insurance (LMI) above that limit. This protects the
extension) "or" is used to denote the person who
lender in the event of default, and with it in place some
performs an action; while the suffix "ee" is used to
lenders are prepared to accept LVRs as high as 95%.
denote the recipient of that action. Since the
buyer/borrower is pledging the property, he/she is
LMI is paid by the borrower. The premium is
"mortgaging" the property and in known as the
determined upfront, but there is no need to pay it that
"mortgagor". The lender is the recipient of the pledge,
way. The premium may, as an alternative, be
and therefore is the "mortgagee".
‘capitalised’. Capitalising the LMI premium essentially
means adding it to the total loan amount, and paying it
An easy way to remember the difference between the
off in regular instalments with the home loan. Most
"mortgagor" and the “mortgagee” is:
borrowers opt for the capitalisation option, which is
The "o" in "mortgagor" comes from the "o" in commonly put forward as costing no more than a cups
"borrower". The "e" in "mortgagee" comes from the "e" of coffee or so a week.
in "lender":
Example – Lender’s Mortgage Insurance
Likewise, although you may not be concerned
with lease finance, there is a similar distinction
(LMI)7
between “lessor” and “lessee”. A lessor is a person Newlyweds Tim and Erica are battling to save a deposit
or organization that owns an asset, such as real estate, for their home, and currently spend approximately 32%
and a lessee is a person or organization that makes of their combined monthly salary on rent.
instalment payments to use the asset. In real estate
rentals, the lessor is the landlord and the lessee is the Paying rent is putting a real strain on their ability to
renter. save a deposit and after speaking with their mortgage
broker, Tim and Erica learn they can secure a mortgage
So in the case of real estate transactions involving real for up to 95% of the value of the property they hope to
estate, both the mortgagor and the lessor have buy if they take out Lenders Mortgage Insurance.
ownership of the property.
Tim and Erica have saved $20,000 for a deposit and
LOAN TO VALUE RATIO additional funds to comfortably meet the other
commitments associated with their mortgage – such as
A term that you will need to be used to when you look
solicitor and application fees. They have learnt they can
at home lending products is the Loan to Value Ratio
secure a mortgage with an LVR of 95% if they take out
(LVR). This is the amount of the loan divided by the
Lenders Mortgage Insurance (LMI). However, it took
value of the property being acquired. As such it
them long enough to save their deposit of $20,000.
represents the maximum percentage that the bank is
Having to save $12,426 for the required LMI will take
prepared to lend.
too long.

Example - Loan to value ratio (LVR)
Matthew is buying a house for $1,000,000. With careful
saving, he and his wife have accumulated $200,000.
They will therefore require a loan of $800,000.
Their LVR will be:
$800,000/$1,000,000 = 80%
Keen to help Tim and Erica to buy the property they
have set their hearts on, their mortgage broker advises
that they can capitalise their LMI – which means adding
the cost of the premium to their mortgage.
Buying their new home for $400,000 with a home loan
of $380,000 the monthly repayments on their 30-year
mortgage (rate 6.82%) comes to approximately $2,482.

7 Based on an example from Gemworth.

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 6 3. MORTGAGE BROKING
6
The Lenders Mortgage Insurance premium on their
$380,000 home loan comes to approximately $12,426.
If Tim and Erica capitalise their Lenders Mortgage
Insurance premium, it will increase their monthly
mortgage repayments by $81, taking the total monthly
mortgage repayment to $2,563.
ASSISTANCE TO FIRST HOME BUYERS
Government grants and stamp duty exemptions can
provide first home buyers with significant concessions.
1. The First Home Owners Grant
The First Home Owners Grant (FHOG) is given in the
form of cash to add to the borrower’s deposit and it
is usually paid at the time of property settlement.
Eligible applicants are Australian citizens or
permanent residents buying their first home. A
means test is not applied.
The Australian government provides a base amount
of $7,000, but various states impose a cap on cost
price above which the FHOG is not payable. For
example, in NSW, first homeowners purchasing a
first home above $650,000 cost price will not
receive the first home owners’ grant.
State governments have their own rules on
qualification for the grants and also the amount for
the grant. In NSW, the state government provides a
bonus $8,000 (additional to the base $7,000) to
make total first home buyers grant equal to
$15,000, but to qualify the property being
purchased must be a brand new property. More
states have, or plan to soon introduce, similar
policy.
2. Stamp Duty Exemption
Stamp duty exemption may apply, depending on the
state. For example, NSW provides eligible
purchasers with exemptions from transfer duty on
new homes valued up to $550,000 and concessions
for new homes valued between $550,000 and
$650,000.
The exemption is normally applied for by the lending
institution, with the amount being debited to the
applicant’s loan account.
As with the FHOG, a means test is not applied.
MORTGAGE LOAN PRODUCTS
Although there are differences between the individual
products of different lenders, including in some cases
the names of the products, there are still core
characteristics that allow the products to be discussed
in general terms.
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New products are introduced from time to time, and
features of existing products may change. Mortgage
brokers need to be alert to any information regarding
change from product providers, with information being
disseminated through such means as team meetings
and seminars. Also, if necessary, training programs
should be put in place to ensure that changes are
properly understood.
Brokers should also be prepared to discuss the different
products with theirs clients and point out their different
features so that an informed choice can be made.
Variable home loan interest rates
Most Australian home loans are variable rate loans,
with interest rates fluctuating approximately in parallel
with the Reserve Bank of Australia’s ‘cash rate’. The
Reserve Bank uses the cash rate as a blunt instrument
to try to control inflation – when inflation is becoming
too high (typically when the economy is doing well) the
cash rate goes up; when the economy is perceived as
being weaker (inflation usually is lower) the cash rate
often comes down.
If variable interest rates increase, loan repayments
increase. This, however, creates an addition burden on
borrower. When an interest rate increase is unusually
large, banks may be prepared to lengthen the term to
maturity, thereby lessening the term to maturity by
lowering repayments.
If, instead, interest rates decrease, loan repayments are
usually allowed to remain the same, although
borrowers may be able to negotiate lower repayments
Pros:  If interest rates drop, repayments also
drop
Cons:  If interest rates rise, repayments also rise
Fixed home loan interest rates
A fixed rate loan is a loan that has a fixed interest rate
and therefore fixed loan repayments. The time period
of these loans can vary, but lenders can usually ‘lock in’
their repayments for between 1-5 years. Although the
fixed rate period may be, say, 3 years, the total length
of the loan itself may be 25 or 30 years. At the end of
the fixed loan period the lender can decide whether to
fix the loan again for another period at the current
market rates or convert the loan to a variable interest
rate for the remaining term of the loan.
 7 3. MORTGAGE BROKING
7
In general, if lenders expect the cash rate to rise, the
fixed rate will usually be higher than the variable rate;
on the other hand, if they expect the cash rate to fall,
the fixed rate will tend to be lower than the current
variable rate.
Lenders may offer fixed terms between 1 and 15 years,
although most fixed term loans are for less than 5
years.
Pros:  Repayments do not rise if the official
interest rate rises
 Provides peace of mind for borrowers
concerned about rate rises
 Allows more precise budgeting
Cons:  Repayments do not fall if rates fall
 Financial penalties may apply if there is
any early return to variable rate, or early
repayment of the loan
Interest-only home Loans
Only interest is paid during an interest only period –
usually one to five years. Principal repayments are then
paid with interest payments over the remaining term of
the loan.
Pros:  Lower repayments initially, more money
to renovate/improve the property
 Cuts the cost of buying a residential
investment property in the short-term,
thereby allowing the borrower to make
which could allow you to make greater
contributions to their principal place of
residence
Cons:  If interest rates rise, repayments also rise
 There will be sudden increase in
repayments at the end of the interest
only period when the loan converts to
principal and interest repayments
Interest only loans are used primarily for property
investment, the argument for them being that there is
likely to have been realisable capital gain by the end of
the interest-free period. APRA and the Reserve Bank,
however, are concerned that the percentage of
homeowners taking them out is increasing. Their
argument against them is that by the end of the
interest-free period homeowner borrowers will not only
have the burden of principal repayments, but higher
interest rates as well.
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The authorities have also been concerned about the
volume of investment loans. In May 2015, APRA wrote
to the banks on the matter and suggested that their
annual growth in investment loans should be limited to
10%. The 10% figure was put forward as guidance
rather than a regulatory requirement, but this is
another reason why the banks will make less money
available for investing in real estate.
Introductory loans
With an introductory loan, the interest rate is usually
low to attract borrowers. Also known as a honeymoon
rate, this rate generally lasts only for around 12 months
before it rises. Rates can be fixed or capped. Most
revert to the standard rates at the end of the
honeymoon period.
Pros:  These loans usually provide the lowest
repayment rates
 Payments are usually lower during the
introductory period
Cons:  Payments usually increase after the
introductory period
Split rate (principal and interest) loans
A split rate loan is a loan that has one portion of the
loan fixed and one portion variable. The borrower can
select how much to allocate to each.
Pros:  Provides some protection against rising
interest rates. This gives a blend of
repayment flexibility and interest rate
security
Cons:  Repayments will still increase if interest
rates rise
Home equity loans (line of credit)
A home equity loan is a line of credit secured by a
mortgage over the owner’s property. Borrowers can
draw down up to their approved limit, reduce the
amount outstanding and then redraw if they want to –
the only commitment is to make interest payments.
Funds drawn from the facility can be used for lifestyle
and investment purposes.
Pros:  Borrowers can use the money for
whatever purpose they choose.
 Interest rates are lower than for many
 8 3. MORTGAGE BROKING
8
other forms of credit
Cons:  No formal commitment to reduce debt
over time
Low-doc loans
Low doc (or ‘lo doc’) home loans are designed for
borrowers, chiefly the self-employed, who fail to qualify
for a normal home loan because they may not have all
the necessary paper work for proof of income, such as
payslips. Instead, the borrower is typically able to sign a
declaration of income with no or little proof. For this
reason they may also be known as self-declared income
loans.
The Financial Ombudsman Service has indicated that a
mortgage broker’s responsible lending obligations are
not met if a client’s self declaration is relied on without
making further inquiries.
Additional documentation that may be required
includes one or more of the following:
 Proof of ABN and/or GST registration
 Business Activity Statements (BAS)
 Business account transaction statements
 Accountant’s letter
 Personal tax return.
Pros:
 Simple income declaration form

 No tax return or financial records
required
 Cons:
 Fully serviceable loan options, redraws,
line of credit, variable or fixed rates
 
 Principal & Interest or Interest-only
loans

 needs
Cons:  Generally a higher interest rate because
the risk to the lender is greater
 More limitations in terms of the
maximum Loan to Valuation Ratio (LVR),
available loan features and package
discounts
 Misused by some credit providers with
false income details and falsely
declaration low credit borrowers to be
self employed
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Non-conforming loans
People with poor credit ratings often have trouble
sourcing a home loan. Many lenders now offer what are
known as “non-conforming loans” – also known as
credit-impaired loans’ – for people in this type of
situation. While lenders are willing to overlook prior
credit problems, they will want to see some evidence of
ability to repay the loan. A larger deposit than is
required for traditional loans will generally be required
as well.
Pros:  Overlooks poor credit rating
Cons:  A higher interest rate than traditional
loans
 A larger deposit is likely to be required
Reverse mortgages
A reverse mortgage allows people to borrow money
using the equity in their home as security without a
need to make while they live in the home. The loan can
be taken as a lump sum, a regular income stream, a line
of credit or a combination of these options.
The loan must be repaid in full (including interest and
fees) when the borrower sells their home or dies or, in
most cases, move into aged care.
This type of loan is increasing in popularity with retirees
who no longer have a sufficient income stream to
maintain their lifestyle.
Pros:  Borrowers are able to maintain their
lifestyle
 Interest rates are generally higher than
average home loans
The loan may affect pension eligibility
 The borrower may not have enough
money left for aged care or other future
OTHER FORMS OF CONSUMER
CREDIT
Different types of credit are better suited to some
situations than others, and choosing the appropriate
form of credit can help the borrower to minimise
interest payments and manage money better. A
personal loan, for example, with fixed repayments and
a set term is better suited to large purchases than, say,
a credit card.
 9 3. MORTGAGE BROKING
9
Credit Cards
Credit cards are an ongoing ‘line of credit’ that can be
used for purchases and cash advances. The full amount
borrowed can be paid each month or, after a part
payment that can be a small fraction of the amount
owing, be carried over to the next month, with interest
charged on the amount outstanding.
Credit cards tend to come in two varieties: ‘No frills’
cards and those offering reward programs. Basic, ‘no
frills’ cards often have a low rate of interest, making
them ideal for card users who continually carry an
outstanding debt.
The convenience of credit cards comes at a price. In
addition to paying interest of up to 20% or more on any
outstanding balance, the following charges may apply:
 Annual card fees – these may be waived if annual
card spending exceeds a certain limit. On cards
with a low credit limit, a high annual fee can really
boost the overall cost. For example, on a credit
card with a limit of $1,000, an annual fee of $30 is
the equivalent of an extra 3% in interest.
 Reward program fees.
 Late payments fees.
 Cash advance fees – cash advances involve a one-
off fee, e.g. 1.75% of the amount, as well as
interest on the outstanding balance.
 Some merchants may impose a surcharge for
accepting payment with a credit card. The
merchant should advise, but it is always wise to
enquire before making a purchase, especially on
larger-ticket items.
Some credit cards offer a zero interest rate on balances
transferred over from an existing card. These offers can
sound tempting, but the ongoing interest rate applied
to new purchases should be looked at. If it is far higher
than the rate being paid on the consumer’s current
card, a zero rate card may not be such a good deal.
The key to managing credit card debt is to pay off the
outstanding balance at the end of each month. That
way, the comparatively high interest rates can be
avoided. The Nielsen survey referred to earlier found
that almost two-thirds (63%) of Australian consumers
repay their credit card bill in full each month. However,
one-quarter (24%) of Australians repay less than that.
With some only paying the minimum repayment each
month
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Personal Loans
These loans are useful for buying one-off big-ticket
items such as a computer, a car or even a holiday as
well as for consolidating multiple debts into one regular
repayment. They are for amounts ranging from just a
few thousand dollars up to $50,000 or more. They are
repayable over one to seven years, usually with fixed
monthly repayments, which make them easy to budget
for.
The interest rates, fees and charges on personal loans
can vary considerably between lenders. Loans with a
lower rate may come at the cost of higher fees.
When comparisons are made between loans, they
should be based on the ‘comparison’ rate.8 A
comparison rate is a tool to help consumers identify the
true cost of a loan. It is a rate that includes both the
interest rate and fees and charges relating to a loan,
reduced to a single percentage figure.
For example, a loan with an interest rate of 8.75% and
an initial application fee of $65 might have a
comparison rate of 8.93%. A loan with a higher interest
rate but no fees and charges may turn out to be
cheaper.
Line of Credit
A new type of personal loan - a line of credit, combines
flexibility with the potential to save on interest.
Instead of drawing all the funds on day one, just the
amount needed can be drawdown - usually via ATM or
cheque book.
They have been available in the past in the form of
housing loan redraw facilities, but some banks are now
offering unsecured lines of credit. The main advantage
is a lower rate of interest, and the loan may be made
without account keeping charges. However, there may
be an ‘establishment fee’, but it may be less than $100.
Also to be considered is that the term is much longer
than the term of a personal loan. That may seem like an
advantage, but it may lead to much slower debt
reduction unless strong discipline is exercised.
Example – Different forms of consumer credit
compared 9
Let’s say for example that you want to buy new
furniture costing $3,000. What it will cost you using
8 This is a National Credit Code requirement.
9 The example is from CitiBank
 10 3. MORTGAGE BROKING
10
three different types of credit is shown below. The Because the lease payments do not provide for full
personal loan is the cheapest option for this type of recovery of the purchase cost of the equipment, they
purchase because it combines a relatively low rate are usually lower than the equivalent payments on a
with a short term. personal loan.
Type of Interest Monthly repayments Time Total
credit rate taken to interest At the end of the lease period, the consumer has three
repay charge options:
credit
i. acquire ownership by paying the residual value;
Credit 15% Minimum repayment 26 years $4,456
card of 2% of outstanding ii. hand the item back to the finance provider; or
balance
iii. begin a new lease with an upgraded model of
Personal 10% $63 monthly 5 years $824 the equipment.
loan
The lack of ownership that goes with a lease may not be
Home 7.25% An extra $23 a 20 years $2,691 a problem if payments are made on time, but it can
loan month when $3,000
redraw is added to an certainly be a problem if there is a default on lease
existing mortgage of payments. That is because the finance provider, as
$200,000 payable owner of the equipment, can retake possession
over 20 years. immediately.

The first lesson on the responsible use of credit is

therefore to choose a suitable form of credit for the
purpose, with credit card debt being the least suitable
for any term that goes beyond the end-of-month
balance.
Consumer Leases
Leasing is an option that can be a useful alternative to a
personal loan, and the financing costs can be roughly
equivalent. With a lease, the finance provider owns the
equipment, with the consumer paying a regular lease
payment – for instance monthly – for use of the
equipment.
ASIC has warned that this can be an expensive form of
finance for smaller consumer items such as TV sets and
home computers, with other alternatives such as a no
interest loan being a better alternative.
However, with large ticket items such as motor vehicles,
a lease may be obtained for a financing cost equivalent
to a personal loan, with many advantages.
The main advantage for many consumers is that, unlike
personal loans, the consumer does not have to make an
up-front payment such as a deposit. A lease is therefore
a ‘100%’ from of finance. The lease payments, which
are constant for the period of the lease, take into
account the finance cost and the depreciation of the
equipment. At the end of the lease period there is a
residual value, which is roughly equivalent to – although
usually slightly more than – the value of the vehicle.
OTHER FINANCIAL SERVICES
Although mortgage brokers are normally associated in
the public’s mind with lending, they may also provide
financial planning services. Considering that most
Australians:
 do not have adequate life insurance; and
 do not exercise their right to choose their own
superannuation fund, this may be a useful service to
clients.
They need to operate under another license to operate
as a financial planner – an Australian Financial Services
They also need more information. In particular they
need to determine the client’s risk profile – broadly
whether they have a conservative, balanced or
aggressive risk profile. A clients risk profile is found by
using a specially designed questionnaire.
Mortgage brokers who offer financial planning services
usually bring the matter up once the client’s credit
application has been forwarded to the credit provider.
That provides the time between completion of the
credit application and the loan settlement, which may
be up to four weeks, to provide financial advice to the
client.

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 11 3. MORTGAGE BROKING
11
There are two advantages in doing this. The first and
most obvious is that it provides an opportunity to earn
extra income without the need to prospect for financial
planning clients. The second advantage is that, since
financial planning clients normally meet their planner
for an “annual review”, it maintains client contact and
provides an opportunity for more mortgage broking
business.
COMPARISON INTEREST RATES
When a comparison is made between finance offered
by different providers, the comparison should be
between all the features if the finance, including
interest rates and charges. Even a small difference in
the interest rate can make a big difference to
payments over time.
It is difficult to compare loans that have different
interest rates and fees. To overcome this, lenders are
required to must give a comparison rate when they
advertise a rate or a weekly payment for loans. The
comparison rate includes the interest rate, plus most
fees and charges.
A comparison rate is made up of the following:
 the amount of the loan;
 the term of the loan;
 the repayment frequency;
 the interest rate; and
 the fees and charges connected with the loan.
Example – Comparison interest rates
Interest rate Fees &
charges10
Home 8%
loan A
Home 8.25%
loan B
In this example, home loan A has a lower interest rate but it has
higher fees and charges. When a comparison is made between the
comparison rates, which lenders are required to provide, home loan B
will cost less than home loan A because it has lower fees and charges.
10 Fees and charges are usually expressed in dollar terms.
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HANDLING CLIENTS
A later chapter will discuss various aspects of a
mortgage broker’s handling of clients, but a matter that
is worth considering now is the way client’s should be
handled. In particular, should a broker attempt to be an
expert on all matters, or should the client be referred to
members of a “team” or some members – consisting of
other members of staff or even external advisers – or
even referred to a more suitable source of finance?
It can be hard to admit that we are not a source of all
knowledge and advice, but that is something
professionals such as accountants and lawyers do every
day. They let clients know when they have to research a
matter, and when required they refer clients to
professionals who have greater expertise. That is
something that mortgage brokers need to learn to do if
they are going to be proper professionals. It is also a
matter of acting in the best interest of clients, which is
what the duty of care is about.
This is indicated in the following example.
Example – Acting in the interests of clients
“Reminiscing about the duty of care mortgage brokers
owed their clients, a retired mortgage broker asked his
audience to consider two matters.
Firstly what industry did they consider they were in? The
audience suggested the loan industry. He replied that
they were in the property industry, which he broke down
into:
 the home buying industry;
Comparison rate
 the investment property industry; and
 the commercial property industry.
0.5% 8.5%
He then asked them to consider their “mindset”, when
0.1% 8.35% they made property loans. He suggested that three
were possible:
1. The Novice: I know nothing! Whatever kind of loan
you want for whatever kind of property you want is
fine by me. I will do what I can to get you the loan,
otherwise leave me out of it.
2. The Protector: I care about your success and would
rather turn down a loan than have you buy a bad
property on my watch. I only have some
fundamental knowledge on property investing but I
have access to a team of experts that I trust that I
can refer you to (and not just because they are
paying me to do so).
 12 3. MORTGAGE BROKING
12
3. The Expert: I will not only organise your loan I will
make sure you invest wisely, because I know plenty
about property investing.
He stressed that the mindset that was most consistent
with the duty of care was the “Protector mindset”, with
the worst one being “the Expert” mindset. He stated his
case in the following words:
‘The Novice is not a lot of help, but at least you are
under no illusions that you are on your own and that
may lead you to finding someone who can help you
invest wisely.
The Expert is the most dangerous because they are
promoting themselves as a property expert and odds
are that they aren’t.
The Protector admits they are not an expert on property
investing and only have a basic knowledge, but they
have sourced a trusted team they can refer you to and
they do have your best interests at heart.
He conclude his talk with the following challenge:
“Are you a protector, an expert, or a novice? And when
it comes to your clients, do you really care?”11
GROWING A MORTGAGE BROKING
BUSINESS
Although there is a range of mortgage lending products
that is common to most mortgage brokers, a common
recommendation for mortgage brokers is to select a
target market segment to concentrate on. The selection
may not be made at the outset – it may take time and
industry experience for a broker to decide on his/her
preferred segment. However, industry writers suggest
that this is the best approach to take.
MARKET SEGMENTATION
For a broker who is already in business, market
segmenting does not need to be difficult. In fact, it’s
often as simple as sitting down and starting to write out
a list of similar characteristics of the business’s clients:
age, marital status, first home buyers, investors, how
they heard about the business, size of deal, why they
chose the broker over another broker.
11 Michael Sloane, ‘What is the Duty of Care’, The Adviser, 5 Feb.
2014.
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Once as many characteristics as possible have been
listed, they should be grouped together to provide a
picture of the types of clients the business has, what
motivates them and how they came to be a client. If it
appears that there is more than one type of client, a
desirable approach to take is to choose the business’s
“ideal” client.
For David Maistre, an American expert on professional
relationships, choosing the ideal client is a matter of
choosing the type of client the firm prefers to work
with. Maister refers to such clients as a “I like these
people” type of client.12 By working with ideal clients,
brokers are more likely to have the level of concern that
is an essential quality of professionalism. They are also
more likely to develop the communication with clients
that leads to “engagement” – that is, a longer-term
relationship that comes from personal connection. The
“picture” of the ideal client then becomes the basis of a
marketing plan designed to attract and capture more of
the same clients.
Who are your own “ideal” clients. Look at your own
ethnic and social background, the types of people you
grew up with and the types of people you went to
school with. Considerations such as this should lead you
to the types of people you prefer to deal with. Likewise,
it may be that you are the sort of professional that they
prefer to deal with.
Maistre indicates that as well as assisting in the
formation of relationships, the development of a target
market segment leads to efficiencies in marketing. He
calls this the “Raspberry Jam Rule”:
“…the wider you spread it, the thinner it gets”.13
In other words, marketing is more effective and more
cost-efficient if it is focussed on a target market.
Market segmentation may also lead to specialisation in
different types of loans. A few come to mind:
 first homebuyer loans
 refinance loans
 low-doc loans
 credit-impaired loans
 construction loans
Some brokers try to do everything. When someone
comes to them for a particular loan, they will say that
12
Maister, D. (1997), True Professionalism, Free Press, New York,
page 24.
13 Maister, D. (1997), Managing the Professional Service Firm , Free
Press, New York, page 121.
 13 3. MORTGAGE BROKING
13
they can do it, and then find out how. In contrast, “High performing people cutting through complexity to
brokers who concentrate on a market segment find a deliver clear solutions that our clients value”.15
niche that they feel comfortable in and then dominate
it. A position statement describes the benefits derived
from using the firm’s services and invites a response. It
Correctly applied, market segmentation is about a
says why you should be using us instead of our
company understanding the needs of its clients and
competitors. It also assists in the development of a
therefore understanding how its clients decide between
marketing strategy.
one product and another.

Segmentation also attracts business. As an American PERFORM SITUATION ANALYSIS

textbook on mortgage broking puts it:
“The most successful brokers find a niche they feel
comfortable with, and then dominate that niche. If
someone in your town is regarded as the expert in
financing homes of over $1 million, then the people
buying these homes, the builders building them, and the
Realtors selling them will all come to this broker so that
the deal goes through.”14
Segmentation, however, should not prevent a broking
firm from straying out of their preferred niche at times,
even if specialist help is required. Nor should it prevent
broking firms from directing clients to firms that
provide more specialist expertise.
DEVELOP STRATEGIES
When the most desirable market segment has been
identified and its important characteristics are known,
attention can be turned to the more difficult task of
developing strategies. For example, a business that
positions itself as providing a streamlined form of
service is likely to adopt this as a strategy for reaching
the target market. Examples of other strategies that
might be adopted include having a wide product range
and being able to match client requirements with the
most appropriate loan.
Once a target market has been established and at least
preliminary thought has been given to appropriate
strategies, the business should put itself through a
situation analysis. This begins with description of the
target market and the practice’s experience with that
market.
A SWOT analysis should then be carried out. This
involves drawing up separate lists of the Strengths,
Weaknesses, Opportunities and Threats facing the
business. Strengths and weaknesses cover factors
internal to the company, while opportunities and
threats cover external factors.
The list of opportunities and threats should be
attempted first. This is because a list of the
opportunities and threats highlights the strengths that
may be made use of (and perhaps further
strengthened) and the weaknesses that need to be
corrected. For example, the main competitor may have
set up effective web pages for selling its products or
services. That may identify a weakness that requires
early attention.
SWOT analysis is illustrated in Figure 2 (over the page).

Ideally, strategies should be based on strengths that are

difficult for competitors to replicate.

PREPARE A POSITION STATEMENT

A position statement describes one or more benefits
that will be received if the firm’s products or services
are utilised rather than those of its competitors.

As an example of the difference between a mission

statement and a position statement, first consider the
mission statement of the international accounting firm
KPMG:

14 Ameen Kamadia, So You Want to Be a Mortgage Broker, Kamrock

Publishing, Houston, Texas (2005), p.100. 15 From KPMG website.

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MB2 – Operating a Mortgage Broking Business PA 010615
 14 3. MORTGAGE BROKING
14
Figure 2: SWOT analysis 16
Strengths
Your specialist marketing
expertise
A new, innovative product or
service
Location of your business
Quality processes and
procedures
Any other aspect of your
business that adds value to your
product or service
Weaknesses
Lack of expertise
Products or services not
differentiated from
competitors’ offerings
Location of your business
Damaged reputation
PROVIDE QUALITY SERVICE
Identifying a target market and developing appropriate
strategies, however, do not lead to success on their
own. An essential final ingredient is a caring attitude
that leads to quality of service. David Maistre, who was
referred to earlier, points out that when people
approach a professional such as a mortgage broker,
they usually do so over a matter of high value with,
long-term consequences or significant risk. They
therefore feel vulnerable and, as Maister points out,
“almost by definition in a state of anxiety and
nervousness”, so “they need to be confident they are in
good hands”.17 They need, in other words, to be assured
that the broker will put their interests first from the
beginning of the relationship.
This means demonstrating a caring attitude from the
beginning of the relationship. The demonstration begins
with simple courtesies, such as the way telephones are
answered. It then extends to the way a prospect is
treated when a meeting takes place. In particular, the
broker must demonstrate a sincere interest in clients
and their problems. This leads to client relationships.
Once a client relationship has been established, a
broker is judged by the quality of service being
provided. This exists apart from technical competence
and covers the client’s whole experience with the firm.
16
From Deena Katz, Deena Katz’s Complete Guide to Practice
Management (2009), page 39.
17 Maister, D. (1997), Managing the Professional Service Firm, page
73.
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Opportunities
A developing medium such as
the internet
Mergers, joint ventures or
strategic alliances
Moving into new market
segments
A new international market
A market vacated by an
ineffective competitor
Threats
A new competitor
Price wars with competitors
Competitor product/service
innovation
Competitors have superior
access to channels of
distribution
Taxation introduced on product
or service
A basic requirement for excellence in quality of service
is that the client’s expectations must be exceeded.
Excellence in quality of service assists in retaining
existing clients as well as the extension of existing client
business. It also leads to referrals. In a survey on the
reasons for referrals conducted by Maister, only 10%
were due to the quality of technical work. The
remaining 90% of referrals were due to the quality of
service.18
OBTAIN REFERRALS
Quality of service leads to referrals, but they generally
do not happen on their own. As important as quality of
service is, referrals are more likely to happen if they are
asked for.
As a relatively passive approach, a line about referrals
can be included in all letters to clients. It is, however,
possible to take more positive control of the word-of-
mouth process. A broker who has developed a sound
relationship with ideal clients, and obviously enjoys that
relationship, can let them know that he/she wants
other clients just like them. Each ideal client can then
be asked to suggest people they know through work,
social networks, etc. Some brokers go further by
schooling their ideal clients in what to say when they
spread word of mouth about them.
A point to remember is that clients who are truly
satisfied are likely to be eager to provide referrals
because this is a way of benefiting social contacts and
family. Asking then to provide referrals does more than
prompt them. It provides them with permission to go
ahead.
The needs of referrals should be obtained promptly,
with relevant organization products being presented to
the client. Mostly, this is a matter of finding out why
they were referred to you. If you cannot assist, you
should be able to suggest someone who can, even if
that means referring them to another mortgage broking
business. Remember your name was mentioned as
someone who would be able to help meet a need, so
you should be as helpful and courteous as possible.
REACHING OUT TO NEW CLIENTS
As well gaining referrals from clients, the business
should have an active networking program so that
further business is gained through networking. This
involves reaching out to a market segment made up of
the practice’s ideal clients.
18 Maister (1997), Managing the Professional Service Firm, page 81.
 15 3. MORTGAGE BROKING
15
David Maister lists different marketing techniques in
different tiers with diminishing order of effectiveness,
as illustrated in Figure 3.19
Figure 3: Marketing techniques
The first tier:
Seminars (small-scale)
Speeches at client industry
meetings
Articles in client-oriented
(trade) press
Proprietary research on
matters of interest to
prospective clients (this also
provides useful material for
speeches and articles)
The second tier:
Community/civic activities
Networking with potential
referral sources such as
“centres of influence” (see
below)
Newsletters
“Clutching at straws”:
Publicity, brochures, seminars
(ballroom scale), direct mail,
cold calls, sponsorship of
sporting/cultural events,
advertising, video brochures.
APPROACHING CENTRES OF INFLUENCE
The term “Centre of Influence” or COI is used often in
business networking, especially in the financial services
sector.
A COI is a person who is in a position or business that
tends to have great influence with prospects in a target
market. These people are “movers and shakers” in
complimentary but non-competing area. For mortgage
brokers, COIs are likely to be other professionals such as
solicitors and real estate agents who have developed a
loyal client case and have influence in the target
market. They also understand the unique needs of the
members of the target market, what their preferences
are, and how they can be approached.
Other COIs may be professionals such as accountants,
solicitors and financial planners.
Centres of influence need to be “wooed” in the same
way that clients need to be wooed. An essential start is
19 Maister (1997) Managing the Professional Service Firm, page 122.
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These are all more effective
techniques that are worth
attempting because
competence is demonstrated
rather than asserted. They also
all involve giving something to
the prospective client, but no
one tactic will work alone.
While these may be powerful,
the time investment is higher –
the payoff may take many
patient years
These are all more directed to
a very wide target market and
are limited in their effect
evidence of a caring attitude, not only to clients but also
to the COI. This means finding ways to add value to
their business at no cost to them. They might, for
example, be provided with relevant articles or
information, websites, or relevant knowledge that the
adviser discovers in the normal course of business.
Another way of helping COIs is to invite them to a
workshop, seminar or function where they can make
valuable new contacts themselves. They should also be
provided with referrals. An adviser cannot expect
referrals from a COI without providing them in turn.
While recognising COIs as being potentially powerful as
sources of referrals, Maister relegates them to his
second tier of marketing techniques because of the
time required to develop the relationship.20 He sees it as
a matter of long-term courtship that is valuable, but not
likely to provide results within the timeframe of a
marketing plan.
LEARNING FROM OTHER BROKERS
A final point about growing a mortgage broking
business is that the main competition for mortgage
brokers is not other mortgage brokers. Mortgage
brokers only have 45% of the total home lending
market.21 They therefore have room to expand.
It is with the banks and other lenders. Mortgage
brokers should therefore be prepared to help each
other.
An Australian broker has made the following
suggestions:
 “Ask/demand your aggregator to get the most
successful broker to speak at your next PD day –
this could be the most successful broker in terms of
settlements, or most successful with social media,
or referrals and so forth – doesn’t just have to be
volume
 Organise a broker forum of 4 to 8 like-minded
brokers in your area that meets monthly to talk
about their business challenges and experiences
 Publish your experiences, tips and advice in a
blog/article. I’d very much welcome contribution to
my site (blog) but equally I know the broker
industry magazines would love to receive some
content too
 Approach colleagues’ you respect and beg them to
share their knowledge (e.g. article or
20 Maister (1997), Managing the Professional Service Firm, page
128.
21 Source: Mortgage and Finance Association of Australia
 16 3. MORTGAGE BROKING
16
presentation).22
SECURITY OF CLIENT RECORDS
The privacy legislation, which is reviewed in the
following article, places obligations on mortgage
brokers in relation to the security of client records.
Normal guidelines are set out below.
ACCESS TO CLIENT RECORDS
As all client information is confidential, all client records
will be stored in a secure environment at all times.
Only authorised staff will have controlled access to
client information/records.
Financial institutions also consider the impact of their
work practices on the environment. Westpac, for
example, claims to have reduced greenhouse gas
emissions by 40% since 1996. It has also sought to
reduce water and paper consumption. It also has
energy plans for each worksite and reports its emissions
performance in its Annual Report.
Businesses are not on their own in environmental
sustainability issues. In particular, an important source
of information and assistance is provided by
environmental protection agencies in all states and
territories:
 The NSW Environment Protection Authority
 The Victorian Environment Protection Authority

Client records are the property of the organisation, but  The Queensland Department of Environment and
clients may have supervised access to their own records Heritage Protection
following written a request, either by mail or  The Tasmanian Environment Protection Authority
electronically, and authorisation by the general
manager, independent living services.  The Western Australian Environment Protection
Authority
DISCLOSURE OF CLIENT INFORMATION  The Northern Territory Environment Protection
Authority
Information contained in a client's record will only be
disclosed with the written consent of the client, parent
or legal guardian specifying the information that is to be
released, except for non-identifying data required by
funding bodies and by government departments for
planning purposes.
The organisation is obliged to disclose information
about a client, with or without the client's consent,
where prescribed as a legal requirement (e.g. breaches
of legislation and criminal activities such as fraud.)

ENVIRONMENT SUSTAINABILITY
Environment sustainability is a growing issue with most
businesses, including mortgage broking and other
businesses operating in the financial services sector.
The pressure is from client and community expectations
rather than legislation.23

Lenders, for example, consider the environmental

impact of their lending and have lists of activities they
will not support through their lending activities. They
also consider the environmental impact of their
suppliers and seek to operate green offices.

22 Blog by Stuart Wemyss, 17 July 2014.

23
Legislative pressure ceased with the repeal of The Energy
Efficiency Opportunities (EEO) Act 2006. The EOO Act, which
required larger businesses to identify and report on
environmental issues, was repealed in 2014.

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