To get a baseline for us to work from, we first need to work out the value of a single transaction with a customer, so we need to answer three basic financial questions. The answers will be different for every broking business, but I’ll do some basic calculations based on my own general assumptions.
- What is your average loan size?
According to the Australian Bureau of Statistics, as at the beginning of 2016, the average home loan nationwide was about $383,000. Different geographical regions, client demographics and loan purposes will produce very different average sizes depending on your business, but I’ll use this figure for our example.
- How long does your average loan last for?
I’m going to stick with my conservative numbers here and say that the average client sticks with the same home loan for a period of 5 years — before they exit or modify it by selling, refinancing, consolidating debts, etc.
This is also one area where the ‘potential’ part comes in. If you actively manage your clients and move them to better loans as appropriate, the average loan may last for a shorter period of time. And no, I am not suggesting, refinancing clients for any reason other than it is of material and clear benefit to them, but it is clear that your clients want to be informed about better deals. According to the Consumers on Brokers Survey (Mortgage Professional Magazine 2015), 52% of clients wanted to be informed by their Broker about refinancing options in the future, mostly on an annual basis.
I’ve never yet come across a Broker with clients who switch loans when they aren’t saving a substantial amount of money by doing so – certainly not just out of generosity so their Broker could get paid a new commission. The concept of ‘churning’ is hugely overstated in my experience, given the apathy most Australians have towards applying for a new loan and changing lenders – unless it is a sizeable saving.
Obviously the great advantage we have as Brokers is that our goal is to get our clients the cheapest loan we can so they are less likely to be refinanced out by someone else and also generating a longer term trail income for ourselves. As such we are clearly aligned with our client’s interests. If there is a better loan we can move them to, we are incentivised to do that as it generates a new upfront commission whilst at the same time saving our client’s money and helping ensure they remain our client for longer.
- What is your average upfront and trail commission?
For the sake of our example I’ll work with an average commission rate of 0.6% upfront (not including GST) and 0.15% trail. Let’s also say that the principal of the average home loan is paid down faster than the 30-year term, at a rate that would see the loan paid off in 15 years. On a $383,000 loan, that means by the end of the seventh year they would owe $286,555.
So at this early stage we can say that our average income for a single loan done for an average client is $2,298 in upfront commission, and $2,468 in trail commission over the 7 years. The total is $4,766.