Not so long ago, the commercial mortgage market was dominated by the high-street clearing banks offering restricted loan-to-values (LTVs) and restricted loan terms and expecting to have all of the borrower’s banking business, not just the mortgage. Broker involvement tended to be minimal, with borrowers seeking finance on their own behalf – normally from the bank with whom they also had a current account and probably overdraft facilities. That scenario is changing fast, and the catalyst has been the entry into the market of specialist commercial mortgage lenders that offer a wide range of products and cater for most credit profiles.
More importantly, the new breed of lenders are centralised, without local branches from which to sell commercial mortgages direct to their customers. Consequently, they have built the intermediary distribution route into their business models at the same time as customers are becoming more aware of the benefits of using a broker, and brokers are looking for additional sources of income.
Intermediary push
A number of factors are driving the intermediary push into commercial mortgages, not least of which is the loss of profitability currently being experienced by advisers in the residential mortgage sector. Research carried out by Alliance & Leicester at the end of 2005 showed that 58 per cent of intermediaries had seen profits decrease since the onset of Financial Services Authority (FSA) regulation, and 51 per cent needed to replace lost turnover. In addition to the expense of regulatory compliance, increased competition among lenders has led to decreasing margins on residential mortgage business, which has had a knock-on effect on procuration fee levels. At the same time, the cost of using direct advertising channels has risen sharply, making the cost per enquiry the highest it has ever been within the mortgage industry.
Next, lender activity is also driving the push into commercial mortgages. The products on offer have taken their lead from the innovative niche lenders in the residential market, and we are seeing self-certification of income, extended terms, more aggressive LTVs, interest-only periods and fixed and discounted rates. On the service side, the speed of payouts mirrors and in some cases improves on residential standards. As far as distribution goes, the rise of specialist lenders has always been associated with a focus on brokers. Now, institutional – as well as specialist – lenders have begun to develop strategies around the needs of intermediaries as their increasing profile and activity is recognised. Proc and packaging fees create an income that is significant enough for intermediary/packager firms to start investing in their own growth – thus contributing to the growth of the whole sector.
The two key sets of intermediaries for commercial mortgage business are specialist commercial finance brokerages – that have traditionally brokered mortgage deals along with other financing arrangements, and commercial packagers that have developed from the residential mortgage packager/distributor community. As both of these types of commercial mortgage intermediary grow and flourish, they have started to invest in the growth of their own business. Confident of lender support, they are offering a greater variety of products, improving completion speeds and conversion rates, and gaining greater control of the application process. The packager/specialist is taking the message of this market opportunity to brokers with vigour, recognising that they have a need in this area but not the time or expertise to become involved.
Partnering arrangements
Looking to the future, there are likely to be a growing number of strategic partnerships between networks and commercial specialists and it is likely we will see the emergence of some ‘super specialists’ that will be writing significant levels of commercial business, together with mortgage and IFA networks, including commercial mortgages within their core offering to members. The message for residential brokers is clear: don’t ignore the commercial opportunities – they are too good to miss. Even at introducer level the benefits will be significant and as you gain more knowledge you can move into being a mainstream player, either on your own or linked to a specialist. Many are realising that they are missing an opportunity to sell a complementary product and perhaps in doing so putting that wider client relationship at risk from somebody else who is. It is a case of want, but increasingly also one of need.
