In the next 36 months, the mortgage business as we know it will noticably change. Among other things, we’ll see cannibalistic rate battles from online sources and a stronger direct-to-consumer marketing push from lenders.
The result is that mortgage margins and per-deal broker compensation will compress. This will have profound impacts on profitability in the prime mortgage market, and brokerage owners have started to realize that.
To make up for smaller mortgage commissions, brokers and brokerages will do their best to create new profit centres. One obvious way is by cross-selling non-mortgage products.
Access to financial products could become an increasingly important differentiator for agents choosing a brokerage. Brokerages are responding by offering a growing array of auxiliary products to add revenue and attract new agents.
This has a range of implications, especially for smaller brokerages that don’t have the scale to negotiate product deals. We suspect it’s also one of the reasons why some industry leaders—like Dominion Lending Centres President Gary Mauris—say: “We’re absolutely going to see more consolidation than ever before” in the brokerage market.
All that said, here is a sample of what various firms are starting to cross-sell:
Unsecured Credit Lines (ULOCs)
ULOCs are a flexible product with many uses. They can fund a mortgage prepayment to lower penalties, cover closing costs, be used as a short-term source of liquidity for a small business, and so on.
Currently, most brokers have to go through a bank or credit union contact to get their clients a ULOC. As a result, brokers generally don’t get paid on them. But we hear that’s about to change for agents with Mortgage Centre Canada (MCC), a division of CIBC.
MCC brokers will soon be able to sell CIBC ULOCs. The rate is pretty decent (starting at prime + 2% and up, depending on approved credit), and the maximum limit (subject to qualification) is reportedly $40,000 or more. We’re told that clients will apply through an online portal and that there is no branch involvement. If arranged to coincide with a mortgage closing, CIBC can even direct ULOC funds to the client’s lawyer.
MCC brokers also have access to other CIBC products, like its:
3.25% three-year fixed with 3% cashback on $400k+ mortgages (the effective rate on this product is phenomenal)
Major broker networks like Mortgage Alliance, VERICO, DLC and Mortgage Architects have now partnered with firms like Home Trust to sell GICs. These GICs and short-term deposits can be registered or non-registered and range from 30 days to five years. A quick perusal of rates shows that Home Trust pays ~20+ bps more than Big 6 bank rates. Brokers reportedly earn up to a point or more on a 5-year term, and proportionately less on shorter terms. Home Trust’s GIC referral program “is the equal of any stand-alone deposit brokering business,” says John Kelly, COO of VERICO.
Brokers have long been able to refer clients to secured credit card providers. And a few lenders, like National Bank, have even distributed unsecured credit cards through brokers. But now, DLC has launched its very own DLC-branded VISA card. (See here)
“We already have borrowers’ financial information, and they feel comfortable completing their mortgage with us,” says Gary Mauris, “So it’s a natural step for them to also get a credit card through us.”
“Our credit card products also offer great value to our clients, including an excellent low-rate option as well as no blackouts in our travel program.” Mauris says DLC brokers are paid on the VISAs in perpetuity.
There’s no shortage of products that brokers can cross-sell via referral programs, including: term life insurance, creditor life insurance, leasing, high-yield savings accounts, tax services, car loans, online trading accounts and property insurance, to name a few. If borrowers can access special promotions on these products through their mortgage broker, there’s no doubt that some will take advantage of them.
Despite the revenue potential, cross-selling is fraught with challenges.
Distraction: Product knowledge is essential to successful cross-selling. Even when you are referring clients to suppliers for product details, clients will still expect you to know what you’re selling. Most brokers who spend time learning and keeping up with auxiliary products must, by definition, spend less time on their specialty (mortgages). That can impact their ability to provide exceptional mortgage service, which is why customers come to them in the first place.
Product quality: Customers won’t buy subpar offerings just because a broker packages them nicely. People want best-of-breed products and/or uncommon value. Brokerages will have to be careful who they partner with, and be prepared to sacrifice pay for greater client benefits.
Low Uptake: Execution is half the battle. If it’s not ultra-easy for clients to act on cross-sell offers, and there isn’t tremendous value, people won’t bite. It may become necessary to position side-products as money-saving promotional offers, which cuts into revenue.
One hassle with certain referral programs is the need for a separate application. That’s a legal and technological challenge that has yet to be overcome. For side-products sold by lenders, customer response would be significantly greater if they could just initial an “Approve Me” box on their mortgage lender’s commitment (and sign a terms of service agreement later). This is something all lenders with credit card offers should explore.
Broker Adoption: Effective sales techniques and presentation are essential if brokers hope to feel confident enough to cross-sell a new product. Without easy training and pre-written sales scripts, most brokers won’t make the effort to hone their cross-selling techniques. It’s just not worth their time to make $100 off a credit card, ULOC or GIC referral (albeit, some products pay much more than this.)
Lost Business: If a broker or third party drops the ball on a cross-sell product, the client may hold the broker responsible. That could eliminate all future business from that client and his/her referrals.
If brokers can provide clients with exceptional special offers and their suppliers provide service that reflects well on the broker, then cross-selling can add incremental revenue.
But it’s not without risk, and there is no way (in our view) that it will offset the compensation drop that online competition will wreak on our industry.