Is diversification the sign of a struggling residential lending industry or the start of a fresh growth phase? Mortgage Business explores the drivers behind the industry’s latest transition
Competitive pressure among lenders, a high rate of consolidation and the diminishing residential loan market have stunted the growth of the mortgage management sector of late. But development opportunities outside residential lending are gathering momentum.
Product diversification isn’t a wildly new concept, but for mortgage managers looking to expand their businesses, widening their products and revenue streams is increasingly looking like a practical and effective solution.
A make-or-buy decision
Mortgage manager Australian First Mortgage (AFM) is convinced of the value of product expansion. Iain Forbes, the lender’s director of sales and marketing, explains that diversification can be a highly economical strategy if a business effectively uses the tools already at its disposal.
“Making our business bigger and better is always on the agenda, but given the market’s current condition, and experience we already have in-house, internal growth makes far more sense than looking for acquisitions,” says Forbes.
In AFM’s case the decision to diversify would not appear to have arisen from thinner times. The company claims to have recorded its highest residential loan volumes ever in July, following four months of consistent growth. AFM, says Forbes, is looking to make the most of its expertise, management skills and existing distribution channels by introducing commercial and leasing finance into its portfolio.
“Commercial and leasing finance were a natural choice for our business as we have the resources at hand to easily introduce them and to support our broker network,” says Forbes.
For AFM, the business’ core offering as a residential lender will remain unchanged. Forbes sees the development of their product offering as a strategy that matches current market needs.
“Commercial products are in demand at the moment – our decision to engage them demonstrates AFM’s ability to adapt. It’s also creating cross selling opportunities for brokers,” he says.
Flexibility and choice
Flexibility is one of the key drivers of diversification, according to Cathy Dimarchos of Sintex.
Dimarchos, also sees product diversification as key to the mortgage management sector capturing and sustaining market share from the banks in the future.
“Many borrowers like to keep their personal and commercial finances together – but don’t like being forced to cross-collateralise their loans. The non-bank sector is far more flexible and this could be very appealing for borrowers,” she says.
For mortgage managers looking to diversify their product range, there are plenty of options to choose from, including commercial, leasing, insurance and equity-based products to help them build a one-stop solution for borrowers.
Dimarchos says this ‘one-stop-shop’ approach will go a long way to help fortify the non-bank sector’s competitive stance.
“It’s really about creating and managing a presence in the market place, and the broader the range made available by the non-bank sector, the better,” Dimarchos says.
David Gouge, director of Merchant Mortgages, agrees that mortgage managers are showing a noticeable trend towards product diversification.
As a commercial lender, Gouge describes the interest in product diversification as an exponential growth curve.
“For some mortgage managers, having that category-killing or niche lead product will always make sense, but the value of a larger product offering is starting to gain appeal,” says Gouge.
Benefits aside, product diversification is not without its challenges, warns Gouge, who says lenders can be tempted to place the expectation on their loan writers to ‘step up’ to the challenge, rather than viewing their own role as key.
“For diversification to achieve real strength for a business, it must be managed with a strategic mindset,” he says.