The commercial mortgage market has been experiencing a lot of activity lately with new lenders entering the marketplace. The Derbyshire and Nottinghamshire BS have entered the sector in the last few weeks alone, with speculation that others may follow. Go Business Mortgages has also started trading, headed up by the former chief executive of The Mortgage Lender.
Why the sudden interest? It’s all about diversification strategy, which many lending and broking organisations are seeing as one of the answers to the challenges facing them in the short and medium-term. The industry overall is changing, with consolidation being driven by intense competition and regulatory changes, an issue that applies to both product providers and distributors. Margins are generally being eroded and costs for the industry are on the increase. On the back of this, advisers are quite rightly looking at other markets to compensate for traditional business that may be lost and to provide their firms with some new ways of generating income.
Key factors
In the mortgage intermediary sector, there are a number of key factors that have combined to make a case for the inclusion of commercial finance, and particularly mortgages, alongside traditional residential products.
Commercial borrowers would historically always be required to provide three years audited accounts, cashflow projections, business plans and personal asset and liability statements. If a borrower could not conform to the above, they would find it difficult to access a competitive commercial mortgage.
With institutional lenders continuing to focus their efforts on larger corporate clients, the growing number of smaller businesses and self-employed had found themselves largely excluded. Specialist lenders have entered the market bringing with them specialist products that cater for the needs of this borrower segment with greater flexibility in regard to the financial information that can be used to support the loan application. This wider range of products has made broking in this market significantly more attractive and viable.
Changing behaviour
Changing customer behaviour is also helping to make diversification into commercial mortgages possible for more brokers. Historically, the first step for a customer seeking commercial finance would have been to approach the bank that he/she used for their business banking facilities. This attitude is changing as commercial customers realise the wide range of choices open to them beyond their traditional banking arrangements, and begin to experience the speed, service and product range benefits of using an intermediary.
Increasing competition in the residential market (65 per cent of all residential mortgages transacted by a broker) and the relative lack of competition within the commercial sector (15 per cent of commercial transactions via broker channels) has been rightly interpreted as an opportunity to be seized by a number of brokers. Uncertainty in the marketplace caused by regulatory and competitive changes means diversifying into new markets is increasingly attractive for broker businesses looking for growth. New markets and products offer a broker the ability to increase their revenue, and with commercial mortgages it is in many ways just a case of beginning to work existing clients and current marketing activity harder.
Perfect position
According to DataMonitor, two-thirds of intermediaries have at least 25 per cent of their customer base made up of self-employed customers. Brokers have corporate clients and are perfectly positioned to tap into the commercial business sitting in their existing database. In many ways it is a good excuse to communicate with all past and present customers – at the very least the client is reminded of both your brand and your services.
More and more advisers are recognising they are ideally placed to gain considerable new business from the commercial finance market. It delivers a new revenue stream, cross-selling opportunities and more diversity to their current business practice. As commercial mortgages are offered more widely in the market, it is becoming the case that those who cannot assist with commercial enquiries will find a gap in their product menu: a gap others will be keen to exploit. Are you making the most of this market? Are you asking clients the commercial question?
