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Despite a very competitive banking sector in Invercargill, mortgage brokers are still playing a vital role in the economy, and are responsible for around 40% of all the mortgages written in Southland. They are generally soon as the go-to source of good professional independent advice, and for many potential homeowners the last real chance for getting a mortgage.
The sector has changed dramatically within the last 6 or 7 years, is the government has clampdown firmly on all the cowboy operators who were causing all sorts of trouble during and after the 2008 financial crash. Air New Zealand a large component of the crash was directly attributable to the large number of homeowners and investors who found them suddenly unable to make their mortgage repayments. Most of these people should never have had a mortgage of the size and terms that their mortgage broker obtain for them, and they would not have passed the approval process if the complete truth was told about them by their mortgage broker. Mortgage broking is particularly lucrative in a thriving housing market, but to make any money the broker has to complete the deal and make sure that the mortgage is paid out. This is what led to cowboy operators doing whatever it took to win mortgage deals, and in most cases this involved either outright lying or exaggerating or hiding their clients through financial ability to make mortgage repayments. In the end many of these clients were simply unable to make payments when their portfolio ran into problems through job loss etc, and the result was a lot of pain and misery, a lot of bankruptcies, and a lot of suicides and poor health.
The shady practices used by the Breakers wheel horribly exposed after the crash, and in 2011 the government brought in strict regulations forcing all mortgage brokers to become registered financial advisers, which involve passing difficult examinations. The brokers also forced to adopt a formal complaints process and to belong to a formal dispute resolution process. This was a significant shock to a lot of mortgage brokers, and for some the study and examinations we’re just too difficult, and for others the risk of being exposed to a complaints process and a dispute resolution process was just too risky to contemplate.
The result in 2017 is a mortgage broking industry that is much cleaner, with qualified and experienced professionals providing a valuable service to both customers and Banks. Most mortgage brokers are happy to display their qualifications in a disclosure statement on their website, and customers can generally be satisfied that they will get a proficient and professional service from their chosen broker.
This much improved professional approach from brokers is is very appropriate in the new financial climate, where banks are being far more selective about who they lend to. They are being driven by directions from the reserve bank who has regulated on the minimum deposit allowable for residential and commercial customers, but also thanks themselves must be a lot more cautious about risk. The end result is that mortgages are just that much harder to get, and the buyer was must jump through more hoops with the individual Banks, and must look around as widely as possible if they want the best deal on the market. Into this gap steps the mortgage broking industry who are operating on a lucrative commission basis but are also strictly regulated, and as a result they are generally providing a very professional advisory service as well as organising and facilitating the actual mortgage and finding the very best deal.
While some clients are really just dreaming in terms of what they’re going to be able to do and buying a home, many clients just need some good advice and a bit of lateral thinking in order to qualify for a good mortgage. Mortgage brokers are very well equipped to help them with this, and in many cases the brokers are able to advise their clients on how to restructure their finances and perhaps even how to resent their employment in such a way that the banks will see them as a credible lending target. A large percentage of their clients see the mortgage acquisition process as difficult, confusing and even intimidating, and unless they are very confident in their own negotiating ability they see themselves at a distinct disadvantage if they are dealing directly with their bank for the mortgage. Only a small proportion all the population are truly capable of effectively negotiating with their bank for a good mortgage, and most of the remainder understand us and I’ve only too happy to let their mortgage broker carry out this work. The attractive thing for borrowers is that the service is free, as the broker will be compensated by commission payment once the deal has gone through.
There are today around 90 different lending products on the market from around 14 Banks, 3 building societies, 5 credit unions, one crown agency, 7 non-Bank lenders, two insurance companies and three mortgage trusts. Trying to choose a good deal in this mix is very complex and intimidating for most people, and this is the area that mortgage brokers excel at.
For example, a self employed developer will need short term finance for the duration of their development project, then they will be able to sustain much higher interest rates because the loan is only for a short term. Thanks a very reluctant to learn to the self-employed, but non Bank lenders and mortgage trusts will generally be much more willing, as long as they are comfortable that they have done enough due diligence to know that the loan will be paid back. These loans are generally very lucrative for the non Bank lenders, but they do need to be careful who they lend to, for what projects they lend the money for and how much they ultimately lend. They will generally impose complex Milestone requirements, and it will generally take a skilled mortgage broker to work through all these requirements and marry up the needs of the developer with the needs of the lender.
An interesting development in the residential lending market is the massive increase the new business that arrives over the Internet as a result of Google searches. Over 9000 relevant searches per month take place for mortgage broker related questions, and even assuming that only 50% of these searches translate into new business, then the volume of new business coming over the Internet is still very large. There is a steadily increasing trend in Invercargill, Southland and around the world for consumers to purchase anything they can over the Internet, and buying a house is no exception. Consumers will use the Internet in almost every case to locate a property to purchase, and will then use the Internet as a resource to find out how to go about purchasing the property, and then they will search for a mortgage broker and other industry professionals over the Internet.
The irony is that around 99% of all these Google searches end up on the websites of a small handful of large companies that have spent a lot of money getting themselves on page 1 and is closest possible to rank number one. These companies may comprise only 5 to 10% of the mortgage broking industry, but will be winning at least 95% of all the online new business. The vast bulk of mortgage broking companies cannot afford to get themselves ranked on page one and to stay there, and so they are largely shut out of this lucrative High volume market. Unless they join a larger mortgage broking group they have to resort to tried and true marketing methods such as networking, references and repeat business. Meanwhile the company’s on page 1 of Google search being relatively flooded with new business, which means they can be very selective about the customers they choose and they can also deliver poor service and not be penalised in the process. There is always another train coming in 5 minutes.
This opens up the opportunity for new service providers who have the web development and SEO skills to get their own website up on page 1, and from there start tapping into this vast flood of new business and selling any of the resulting leads to the remainder of the brokers who are not on page 1 or page 2. In the new economy there is always room for skilled operators who can simplify or enable specialists in any industry to win more business to provide better service for less cost.
It is ironic that the vast bulk of brokers in Invercargill, Southland who are not able to tap into this massive new stream of business are almost certainly providing a better service then a few brokers who are handling the flood of new customers. The unlucky brokers have to work much harder to win business, and have to work much harder on behalf of their clients to organise the deal. They are hungry and the customers who deal with them definitely know this.
1 area where the independent brokers provide a better service is in dealing with first home buyers, particularly those who are only marginally able to qualify for a loan. These customers require a lot of effort from the broker to fully understand their situation and to fully explore all the options that are available to them, and then to provide professional advice as to how the customer proceeds. They may for example advise the customer to get a job or for their partner to get a job In the short term, in order to make themselves much more presentable to the bank, and hence the mortgage broker will have to park this client for a few months say before they see any financial reward for the effort. The large broker companies can conclude with very little risk to themselves that these customers are just too difficult and not worth putting any time into, and they can ignore this new business and just wait for the next new lead to roll in the door.
The government has promising a massive expansion of affordable housing over the next few years, particularly targeted at first home buyers, and this will present a major competition for the banks and the mortgage brokers for new clients. There will no doubt be new lending products and complex regulations, and competent mortgage brokers will be already gearing up to make sure they can meet this market. The target customers for the new housing will largely be young millennials, looking for their first home, and it almost all cases these millennials will search online for their home and the professionals they need to enable the purchase. As it stands, most of this business will end up in the lapse of a few large wealthy mortgage broking companies, but this model can be disrupted buy skilled operators who are able to get your own website went onto page 1 and start tapping into this massive new market.
These first home owners must pay a 20% deposit on their loan unless they qualify for a 10% deposit on a Welcome Home loan. They will need to be earning as an individual less than $85,000 per annum or as a couple less than $130,000 per annum, and the banks will restrict the amount of borrowing to list then around $550,000 in Southland and $450,000 elsewhere. The new government funded housing will obviously need to cost much less than the $500,000 maximum because the customer also needs to purchase land. The opportunity here is for new prefabricated houses that can be erected very quickly but to very high standards of quality, with all the panels having been assembled in a massive manufacturing plant. If a New Zealand large scale manufacturer adopt the Swedish or Japanese model, they will be able to build prefabricated houses that can be erected on site in one day, and can have a 30 year guarantee because the factory quality of the panels is so high.