Why many new brokers get taken by surprise
Mortgage brokers face significant set up and ongoing operating costs that many industry newcomers fail to consider.
Self employed brokers face the biggest costs by far but even PAYG brokers face significant roadblocks to profitability depending on the brokerage and aggregator they choose.
The setup costs will sting
There are many different types of licenses, memberships and insurances that you’ll need to sign up for before you can even start writing business.
The cost of setting up includes:
- Aggregator joining fee: $0 – $150,000 for a franchise.
- Credit licence (if operating under your own): Approximately $2,000 in regulator fees and up to $8,000 in consultant fees.
- Police history check: $42
- External Dispute Resolution (EDR) upfront fee: For the Credit Investment Ombudsman (CIO), the upfront fee for an ACL holder is $350 and, for the Financial Ombudsman Service (FOS), the upfront fee is $165.
- Professional Indemnity Insurance (PI insurance): The Australian Securities and Investments Commission (ASIC) requires you to have a minimum of $2 million in aggregate and $1 million per claim of PI cover. Premiums varies from insurer to insurer so shop around.
- Cert IV or Diploma: Depending on the registered training provider (RTO), a Certificate IV in Finance and Mortgage Broking (FNS40815) can cost $585 while a Diploma in Finance and Mortgage Broking Management (FNS50315) can $1090.
- Industry association membership: Mortgage and Finance Association of Australia (MFAA) or Finance Brokers Association of Australia (FBAA) membership can cost anywhere between $400-500.
So, just to get started, you’re looking at upwards of $150,000 to start your own mortgage broking business.
There are ongoing broking costs to consider
- Annual professional body membership fee: $400-500 depending on the association.
- Monthly aggregator fee: As a general rule, $1,000 per month including up to $150 a month for leads. Check out the choosing an aggregator page to find out whether you’re getting what you’re paying for.
- EDR ongoing fee: CIO’s annual fee is $140 and FOS’ varies depending on when the application is made (check the FOS website for more details).
- Continuing training and professional development (CPD): Undertaking a PD course or attending a seminar can cost anywhere between $150-$250. These costs should be covered by your aggregator membership but it’s important to check the aggregator agreement before signing up.
The costs of running a business
Choosing whether to work for a brokerage on a contract or PAYG basis, or go it alone as a sole trader, is the first decision you’ll need to make.
Many people like the idea of working for themselves, to do things their own way and to have a better work/life balance.
However, this is typically something you can only achieve over the long-term, after you’ve built a solid book of referrals and repeat business.
In the meantime, you’re facing with significant business costs.
Most Australian businesses fail within the first 2 years largely because of this reason – we’d say it’s even less for self-employed brokers.
As a general rule, around 50% of your commissions as a self-employed broker will go into operating costs. These costs include:
- Rent for your business premises: The market for commercial office space is fickle and prices change fast. This is particularly true of metro locations where competition can see you paying as much as $2,000 a month for a 8-10 person office space.
- Marketing and communications: These costs can vary but luckily it’s become a lot cheaper since the advent of Facebook. However, what you’re really looking for is a solid return on investment (ROI). With many advertising platforms out there, from Google ads to website traffic, without a dedicated strategy and ongoing management, you’re likely to generate minimal leads and most of them will be unqualified.
- Telecommunications, IT and systems: Cloud computing has certainly made it easier and cheaper to store files but there’s no getting away from hardware including internet costs, laptops, client relationship management (CRM) software, cyber security and mobile phones. You could be looking at $40,000 per year.
- Market data subscriptions: These subscriptions will help improve the way you pre-assess clients and simply provide that value-add to really set you apart from the competition. For example, you can provide customers with a free property report.
- Travel costs and client entertaining: This applies more to mobile mortgage brokers but sometimes there’s no getting around it.
- Staff salaries: You may only need to cover the salary of one broker support team member but it will still be your main expense because broking is a labour-intensive business. Luckily, this is largely a fixed cost, albeit there will be salary reviews.
- Cash on standby: As a general rule for a small business, you should have at least 50% of your expenses saved as cash in the bank. If this is in the form of a business loan, you’ll have to add interest payments on top of that.
Save thousands as a PAYG
If you were to instead work as a PAYG or a contractor for a brokerage, a lot of your operating costs should be covered, allowing you to maximise your profits.
Not every brokerage or aggregator is the same!
Some may only cover some part of your professional development and provide no training at all.
Not many offer the prospect of guaranteed leads and, if they do, they tend to be empty promises on the number and quality.
It’s crucial that you read the brokerage agreement and, if necessary, get legal advice. Our broker agreement is fair and we offer a lot in return including:
- A guaranteed 50-80 leads per month at $54,000 p.a.
- Support staff at $48,000 p.a.
- Training valued at more than $20,000.
- Systems valued at more than $20,000.
That works out to be a total investment of $142,000 in one year alone, not including your $65,000 base salary.
For all of this, all you’ll pay is around $2,500 upfront and then $400 each year after that.
Learn more about joining Home Loan Experts on our careers page.
Why operating costs have increased over the years
According to Macquarie’s ‘2015 Mortgage Broking Benchmarking Report’, reasons for decreased profits are driven by deteriorating market conditions (49% of respondents) and cost increases (45%), with increased competition at 30%.
The costs of doing business can skyrocket during periods when economists and regulators perceive a housing bubble.
When you add to this that you may be required split commissions with a referrer and pay clawback for loans that are refinanced within the first two years, trying to stay profitable is a challenge when you go it alone.
Have you considered outsourcing?
Paying salaries for administration staff can be costly but doing the paperwork yourself isn’t dollar productive for you.
What’s the solution?
You may want to consider outsourcing your admin requirements offshore where the cost of labour is minimal.
Bear in mind, outsourcing is different to offshoring, where you set up an office overseas.
This requires significant upfront costs and you need to meet local employment and tax regulations.
In addition, you need to make a significant investment in training and setting up systems and processes.
Home Loan Experts have actually set this up already in our office in Nepal and employ degree-qualified staff to provide comprehensive broker support services to our team in Sydney.
We can offer these services to you!
Save time and money and focus more of your energy on properly assessing your customers, provide amazing customer service and contacting new leads.
Email firstname.lastname@example.org to find out more!
Want to join Home Loan Experts?
Learn more about what we have to offer on our careers page and then send your resume through to email@example.com.
We’re always looking to hire exceptional candidates.