Brokers introduce 64% of business

Although it is an important statistic, the proportion of mortgage business originated by intermediaries has long been more a matter of guesswork than mathematics but now the truth can be revealed, says Richard Griffiths

As Network Data expects to become a public company by the end of this month, quoted on the AIM market of the London Stock Exchange, I have had the pleasure of visiting various fund managers in the City – potential investors at our flotation.

In presenting Network Data’s business I started off with the usual patter – we do not deal with consumers. As the strapline on our logo says, we provide services to intermediaries.

I invariably found myself explaining the role of brokers in the mortgage market and how they collectively form the largest introductory channel to mortgage lenders.

Gross mortgage lending figures, available on the Council of Mortgage Lenders’ website at www.cml.org.uk, show that 291bn was lent to borrowers in 2004.

So what proportion of this mortgage lending do intermediaries introduce – what is the magic number? Not surprisingly, this was a common question asked by the City fund managers I visited. Nevertheless it threw me onto the defensive with my usual retort being: “Nobody knows the exact figure, but most people in the industry believe it to be well over 50%.”

The resulting quizzical expressions on the faces of the fund managers – some bordering on smirks – told its own story. Even I came out of these investor meetings thinking: “Pathetic – 300bn mortgage lending market and we are playing guessing games when it comes to how much of this is originated by intermediaries.

My article in the May 16 2005 issue of Mortgage Strategy – just one year ago – read: “We all know intermediaries are an important distribution channel for mortgage lenders, introducing over 50% of all new business, while for many centralised lenders this figure rises to 100%.”

At a Royal Bank of Scotland conference this February, when looking at specialist lending, Stephen Knight, executive chairman of GMAC-RFC, went on stage and dazzled the audience with his usual excellent insights and detailed knowledge of the market. He said 53% of all mortgage business came from intermediaries. This seemed to me a rather low figure but perhaps he was including the lending figures of the clearing banks that have, traditionally, not done much business with their local mortgage broker community.

A few slides further into Knight’s presentation, up popped some data on the number of mortgage firms regulated by the Financial Services Authority, but alas these brought us no closer to finding out the real proportion of intermediary produced business. So it was back to square one. I am told that the CML has a detailed breakdown of mortgage lending figures split by distribution channel – branch network, internet and intermediaries.

So the CML knows the real number. Unfortunately, it is not available on the public part of its website but accessible only to its members, which are lenders. Thanks lads. Keep it to yourselves. Don’t worry about the rest of us. Which makes me wonder, why doesn’t it publish the number?

Is this another example of the lender community refusing to acknowledge the importance of intermediaries in the industry?

I have long ranted about the refusal of lenders to admit that intermediaries represent a low cost distribution channel. I have written many articles on the subject over several years, including my columns in Mortgage Strategy on May 9 and September 26 last year.

I have focussed on the apparent reluctance of some lenders to recognise, let alone appreciate, the volumes of mortgage business that come to them via brokers.

You may remember that Matthew Bullock, chief executive of Norwich and Peterborough, when speaking at the Building Societies Association annual conference in Harrogate last year, was reported to have said that “intermediaries rather than banks are the real threat to the growth of building societies”.

This comment featured in my article in Mortgage Strategy on May 16 last year. Speaking at the same conference was John Goodfellow, chief executive of Skipton, who came up with the memorable prediction, “There will be no mortgage networks in 12 months’ time”.

As I said in my article in the May 16 issue: “I shall be glad to prove John wrong as I fully expect Network Data to be around, not just in 12 months’ time, but for a great deal longer.”

Well here we are, 12 months on and not only is Network Data still standing but so are most of the other mortgage networks. This has come as a surprise not only to Goodfellow but also to other pundits – including myself – who had predicted the demise or merger of many of the smaller networks.

Apart from a handful of takeovers and mergers, this hasn’t happened. But never one to be distracted by the facts of life or even simple arithmetic, Richard Coulson, chief executive of Home of Choice, continues to predict that there will only be six networks left standing by the end of this year. I do not agree.

There are signs that some lenders’ attitudes toward intermediaries have shifted dramatically.

I was recently invited to an HBOS conference for its major distributors and was introduced to Benny Higgins, the firm’s new supremo, along with the top brass from the five HBOS brands (see table opposite).

Talk among my fellow delegates was of the seemingly improving attitude of lenders toward intermediaries.

One of the delegates, Stephen Young of Sesame, had worked for Halifax in the 1990s. He summed up its attitude at that time as being one of controlled tolerance of intermediaries – they were regarded as a necessary evil.

Times have changed and brokers are now the best friends of HBOS and most other lenders.

Returning to the magic number itself – the percentage of mortgage business that originates from intermediaries – exasperation finally got the better of me. I decided to have a go at the analysis myself, or rather I exercised the art of delegation. Our lender liaison department contacted each lender and asked for the data that is shown in the table here.

The results show the magic number to be 64%. In other words, nearly two-thirds – or just under 200bn – of mortgage lending originates from the intermediary sector.

There is little doubt that the 64% figure has built up over a long period, stretching back to the early days of John Charcol. A number of factors have contributed to this growth and paramount among these are the following:

  • Since the mid-1980s mortgage advisers have become prevalent in estate agents’ offices, giving them first bite at buyers before they think of going to building societies or banks.
  • Over the same period, the number of mortgage products has proliferated from around 200 to today’s figure of more than 4,000 – before you even count the derivatives of core products that masquerade as branded and exclusive products.
  • Choosing a mortgage is becoming increasingly hard. Applicants need advice before they have the confidence to proceed with applications.
  • As the size of proc fees has grown more financial advisers have been attracted to the market and its earnings potential. The downturn in traditional IFA markets such as mortgage endowments has further propelled the move toward mortgages, with some IFAs dropping their authorisation to advise on or arrange investment products.
  • This influx of financial advisers has fuelled a move to more proactive selling by intermediaries including such things as financial promotions about debt consolidation, mortgages for sub-prime applicants and the ‘cut your monthly payments’ message being promoted to the remortgage market.

Whatever the underlying causes of the growth, brokers should be proud of their achievement in the mortgage market. But what of the future? The CML is forecasting that gross mortgage lending will continue to grow, with early indications that it will break through the 300bn threshold this year.

The growth factors mentioned above are likely to persist for the foreseeable future, particularly in the debt consolidation and remortgage markets.

Once people realise how easy it is to remortgage they will do so every few years. The lenders’ Holy Grail of customer retention remains elusive.
Additional reporting by Barney McCarthyA

What makes intermediaries important to you?

Tom Gurrie is head of intermediary sales at Chelsea
With the growing complexity of mortgages and the increasing number of products available to consumers, experienced and qualified brokers are an invaluable asset in the mortgage market. Consumers’ needs are varied and it is no longer a case of just visiting a high street lender to pick up a straightforward mortgage. The wide choice of rates, terms, repayment options and LTVs available means customers are often baffled when it comes to choosing deals. Brokers’ ability to independently source the right products for clients together with their market knowledge mean consumers can rest assured the products offered to them will be the best matches for their needs and financial circumstances.

Jeff Knight is director of marketing at GMAC-RFC
Without brokers, GMAC-RFC would not be in business – it’s as simple as that. And intermediaries remain an integral part of our growth strategy. They will continue to take a larger slice of the market for a number of reasons. Regulation has helped their cause in many regards. Specialist sectors such as self-cert, buy-to-let and sub-prime are still growing and these products are aligned to intermediaries – it’s not easy to get a sub-prime mortgage from a high street branch. And looking at communication, regulation has forced intermediaries to produce better advertisements, rather than complex ones filled with rates. But the best form of communication is word of mouth and brokers do a fantastic job so the message spreads like a ripple, contributing to the growth of the sector.

Sally Lauder is spokeswoman at Alliance & Leicester
Brokers play a vital role in the market and are important to lenders, not only because thousands of consumers turn to them each year for guidance but also because they understand lenders’ requirements. This ultimately benefits their clients as well as the lenders. The dynamic nature of the mortgage market, the growing complexity of customers’ needs and the requirements of regulation further boost their standing. Consumers will go on seeking advice from brokers largely because of their market knowledge and the convenience and reassurance they offer.

Colin Dale is head of lending at Skipton
Since regulation has made the process of shopping around for mortgages more laborious for borrowers it’s no surprise that more and more brokers are doing the spade work, so their proportion of business generation has risen. For a lender such as Skipton that has always lent on more introduced than direct business, this hasn’t made much difference but I can imagine those lenders that have traditionally relied on customers coming to them direct will be seeing a rise in broker-introduced business.

Mick McGuire is director of business development at Principality
Nearly three-quarters of our residential mortgage business is introduced by intermediaries. Mortgage brokers have become increasingly important in recent years because remortgage customers have turned to them for help in finding the best deals. It is evident that the many types of mortgages available combined with hundreds of lenders to choose from, has greatly increased the complexity of mortgages from the client’s perspective. This mortgage maze is driving clients to trusted advisers who can help them find the right lenders and products for their needs. Because of the importance of intermediaries to our business, we are always looking at new ways to do business with them. Our PrincipalityBrokerpoint.co.uk website went live in May and from a standing start, more than a third of broker business is submitted electronically. For brokers who prefer to use electronic trading platforms, we will be live on the MTE in June and are in discussions with Trigold.

How the magic number was calculated

In the table on the right, the 2004 gross lending figure of 291.2bn has been taken from the Council of Mortgage Lenders’ website, together with the lender names shown in the left hand column.

The CML data extends to 30 lenders that each provide more than 1bn of gross lending. The rump of 7.7bn, or 2.6% of gross lending, is attributable to the other 80 or so lenders operating in the market.

The trading names under which the lenders market their products are self-evident. The lenders have provided the figures for gross lending for each trading name, with the figure in the % broker column being the percentage of business originated by intermediaries.

The figures in the right-hand column and the column totals are a matter of simple arithmetic, giving the magic number of 64%.

There is a difference of 2.8bn in the total lending figures. This is made up of a shortfall of 2bn in the HBOS breakdown due to the CML figure including housing association lending and corporate buy-to-lets, a shortfall of 0.9bn in the RBS breakdown which remains unresolved, and a rounding error of 0.1bn.

We have assumed that the 64% number should be applied to the rump 7.7bn to arrive at the bottom line figures.

There are a lot of round numbers in the table, such as 50%,60%,70% and 80%, which makes me suspect that some of the information gleaned from the lenders has been rounded up or down to what they believe to be the correct figure for their organisations.

I have also made some educated guesses for HSBC and Barclays/ The Woolwich as they were less than cooperative in providing a breakdown of their lending figures.

I am not pretending that the table is perfect but, as the saying goes, you have to start somewhere.

Anecdotal evidence suggests that the proportion of broker-introduced business has risen throughout 2005 and into 2006. For the HBOS group, the figures in the table add up to 78% business originating from intermediaries, – at the HBOS conference mentioned in the main text of this article senior staff were saying this number now exceeds the 80% mark.

National Australia Bank has seen a sharp increase recently as it has courted the intermediary market, notably John Charcol.

The table contains a lot of information to be mined. If you exclude the 100% lenders, for the rest of the trading names that adopt a multi-channel distribution strategy the total drops to 59% originating from intermediaries.

On the other hand if you exclude the clearing banks that have historically done little or no business with intermediaries, for the rest of the lenders that accept intermediary business the number rises to 71%.

The top 10 intermediary brands table below – showing the lenders that do the most business with brokers – features three HBOS brands. Some people may be surprised to note Standard Life Bank at number 10 and the absence of Alliance & Leicester.

You can have countless hours of fun creating such statistics. I’m looking forward to analysing the 2005 gross lending figures in the not-too-distant future.

Hopefully I can knock off a few rough edges and have every confidence we will see an increase in the 64% number.

With the CML showing 2005 gross mortgage lending to be 288bn, a fraction down on the 2004 figure, the magic number needs to be 69% to push intermediary mortgage business over the 200bn mark.

What makes intermediaries important to you?

Joe Rabbit is head of intermediary development at Nationwide
Intermediaries have never been more important to Nationwide. At the beginning of the year we launched a series of roadshows to find out from them what they wanted to see from us. Since then we have been implementing a series of changes to our intermediary proposition including a relationship management programme and service improvements. By the end of the year we will have launched a range of initiatives to ensure that our transparent products are also matched by good service. To put it simply, intermediaries want to be valued by Nationwide and that is what we are aiming to do for them.

Ian Giles is director of marketing at Kensington Mortgages
Since its launch in 1995, Kensington Mortgages has always been committed to intermediaries, mainly because our pioneering work in the specialist mortgage market has taught us that customers who are self-employed and find it hard to prove income or those who have had credit issues in the past tend to benefit the most from using the expertise of professional mortgage advisers. Let’s face it, you’re unlikely to find any specialist mortgage advisers in your local high street branch or in a bank’s call centre. As long as the specialist mortgage market continues to grow, the proportion of business lenders do via intermediaries will increase.

Brian Ewing is head of intermediary sales at Intelligent Finance
Since Intelligent Finance launched, intermediaries have been vital to our success and are responsible for placing more than 80% of our mortgage business. Brokers are crucial in educating clients on how offset works, its benefits and how to use it properly. We work closely with intermediaries and provide them with tools to sell the product such as an offset calculator and marketing literature. We aim to provide a service that we continually enhance, as can be seen by our recent launch of online case tracking.

John Watson is spokesman at Northern Rock
Northern Rock’s lending strategy recognises the fundamental importance of first-class relationships with its intermediary contacts and mortgage recommendations that flow from these contacts. Specialist broker requirements are addressed with a comprehensive portfolio of products that are continuously refreshed, offering good terms, value and choice to borrowers from first-time buyers to lifetime mortgagees releasing equity from their homes. These are supported by a corporate commitment to our intermediary divisional and key accounts functions, business development manager sales force and the delivery of a mortgage application service, principally via the Northern Rock online facility.

Tim Hague is director at BM Solutions
Intermediaries are vital in the mortgage market. With so many products available consumers need experts working on their behalf to get them the best possible deals for their needs. At BM Solutions, 100% of our business comes through intermediaries and therefore our focus is on brokers and ensuring they can offer their clients the most competitive products with top quality service.

Colin Franklin is head of sales at Coventry
The intermediary sector is hugely important to Coventry and we recognise the vital role that intermediaries play in the mortgage market. Our plans for growth centre on intermediary-led business. Currently, nearly 70% of our new lending is sourced through intermediaries and like many building societies with a regional branch presence, our intermediary operation enables us to compete on the national stage and broadens our distribution capabilities. Since Mortgage Day we have invested a great deal in the broker sector as our view is that intermediaries will continue to dominate the mortgage market.

What makes intermediaries imprtant to you?

Gerry Bell is head of mortgage marketing at GE Money Home Lending
For the broker community the sub-prime marketplace is becoming more mainstream and they are doing more of their business with specialist lenders. These lenders are geared up to deal with and service the requirements of intermediaries. With an increasing number of lenders coming into this market and offering greater product choice, greater value and more advanced technology to improve service standards, brokers are becoming spoiled for choice. The consumer demand for broker-sold mortgage deals remains strong as clients see intermediaries being able to provide the expertise to choose the right deals, particularly in the sub-prime market. They like the reassurance that dealing with an FSA-authorised broker brings.

Paul Howard is director of intermediary sales at The Mortgage Works
We believe the intermediary market is important and will be backing this conviction by dedicating one of our brands to intermediaries and their clients later this year. We are currently investing heavily in our business to ensure we can offer intermediaries excellent products and lending criteria. We are also focussing on our service offering and will start rolling out our online trading platform in the second half of this year. We believe that by the end of 2006 we will have the definitive intermediary lending proposition, offering brokers access to products and services across all market sectors. We wouldn’t do any of this if we didn’t think the intermediary sector had a future.

Rob Procter is deputy chief executive at Kent Reliance
Our relationship with intermediaries is key to our growth strategy. By working closely together and establishing a real understanding of each other’s objectives, we have built strong partnerships which ensure that each party knows what the other needs and expects. Our principal introducers produce accurate Key Facts Illustrations, fully completed application forms and comprehensive supporting documentation, ensuring rapid turnaround and early issue of mortgage offers. We pride ourselves on the speed and accuracy of our processing led by our outsourced subsidiary Easiprocess in India and supported by experienced underwriters and intermediary contact staff in Kent. The fact that we have one of the lowest incidences of arrears in the industry is testament to the quality of the business introduced to us. More than 80% of our mainland UK lending is introduced and more than 90% of our business in the Channel Islands.


The public has voted with its feet and consistently turned to brokers

Robert Thickett is news editor at Mortgage Strategy
With 64% of mortgage business being placed via brokers, it’s clear the intermediary sector plays a vital role in the mortgage sector.

But why do consumers still use them? High street banks and societies offer mortgages direct and it couldn’t be easier to walk in off the street or log on to the internet and get a mortgage these days.

The reason consumers use brokers is choice. Intermediaries offer a wide range of products that would otherwise be unavailable to clients, plus a wealth of experience. The one size fits all approach is the antithesis of good broking.

The great British public has voted with its feet and consistently turned to brokers to sort out its mortgage needs. And frankly, with the huge number of specialist products out there ranging from discounts and trackers to fixes, offsets and self-certs, who can blame them?

The average product matrix is bewildering and can befuddle the uninitiated. Terms such as SVR, LTV and base rate roll off industry insiders’ tongues but it’s a different kettle of fish for consumers, and all brokers are familiar with the glazed expression of utter incomprehension.

And that’s before we get to the likes of Key Facts Illustrations, decisions in principle or agreements in principle and the regulatory loops through which brokers now have to help their clients.

Regulation has been the biggest event in mortgage broking in the past decade. Many predicted the transition from the genteel self-regulatory world of the Mortgage Code Compliance Board to the harsh spotlight of the Financial Services Authority would be too much.

And for some it was. But hordes of advisers jumping ship and the demise of specialist areas of the market like packaging? Never happened.

Either there was a lot of praying going on or you all knuckled down and refused to die, as you’re still here and business is booming. Mortgage volumes took a big hit in the month after Mortgage Day (and it wasn’t until mid-2005 before things got back on track) but it’s been the making of many.

The feedback we get at Mortgage Strategy – admittedly often coloured by lenders’ or service providers’ desire to drum up business – is that brokers are getting into peripheral markets from general insurance to commercial mortgages and even will writing.

The one cloud on the horizon for many is the advent of Home Information Packs in 2007. A variety of doomsday scenarios have been outlined, the worst being that it will halt the entire housing market as people are deterred from putting their properties up for sale. If that happens, brokers, lenders, consumers, Labour governments, and even mortgage magazines could be in for a tricky time.

But that’s a year away – in essence the only thing we have to fear is fear itself. Unregulated estate agents could grab hold of your clients when they advertise their properties.

But in all likelihood, consumers will do what they do now and show them the door. People like checks, balances and independent advice. That’s where intermediaries’ strength lies and long may it be so.