ABN prospectus 2004

prospectus

Important Notice

This Prospectus is dated 29 June 2004 and is issued in relation to Mortgage Choice Limited (Mortgage Choice). It was lodged with the Australian Securities and Investments Commission (ASIC) on that date. Neither ASIC nor Australian Stock Exchange (ASX) takes any responsibility for the content of this Prospectus or the merits of the investment to which this Prospectus relates. No securities will be transferred, allotted or issued on the basis of the Prospectus later than 13 months after the date of this Prospectus.

This Prospectus is available in electronic form at www.mortgagechoice.com.au. Applicants using either Application Form attached to the electronic version of this Prospectus must be located within Australia. Any person may obtain a paper copy of this Prospectus (free of charge) by telephoning the Share Registry, ASX Perpetual Registrars Limited, on 1800 054 388 during the period of the Offer. Applications for Shares may only be made on the Application Form attached to or accompanying a hard copy of this Prospectus or a paper copy printed with an electronic version of this Prospectus. The Corporations Act prohibits any person from passing on to another person either Application Form unless it is accompanied by or attached to a hard copy of this Prospectus or the complete and unaltered electronic version of this Prospectus. The Corporations Act prohibits Mortgage Choice from processing Applications in the seven-day Exposure Period after the date of lodgement of this Prospectus. This period may be extended by ASIC by up to a further seven days. Applications received during the Exposure Period will not be processed until after the expiry of that period. No preference will be conferred on Applications received during the Exposure Period. This Prospectus will be made generally available during the Exposure Period at www.mortgagechoice.com.au.

The offer of Shares under this Prospectus does not constitute an offer or invitation to subscribe for any Shares in any jurisdiction other than Australia. This Prospectus is not an offer to any person or an offer in any place, to which or in which it is unlawful to make such an offer. Certain words and expressions used in this Prospectus are defined in the Glossary. The financial amounts expressed in this Prospectus are expressed in Australian currency unless stated otherwise. All references in this Prospectus to time refer to AEST unless stated otherwise. If you apply for Shares in accordance with this Prospectus you will provide personal information to the Company and Share Registry. The Company and the Share Registry collect, hold and use this information to assess your Application, provide information, facilities and services to you in your capacity as a shareholder and otherwise at your request, and carry out appropriate administration. Corporate and tax law requires some of the information to be collected. If you do not provide the information requested, your Application may not be able to be processed efficiently, or at all.

The Company and Share Registry may disclose your personal information for purposes relating to your investment to their agents and service providers including those listed below or as otherwise authorised under the Privacy Act 1988 (Cth):

• the Underwriter, in order to assess your Application;

• the Share Registry, for ongoing administration of the register; and

• printers and the mailing house to prepare and distribute statements and mail.

Under the Privacy Act 1988 (Cth) you may request access to your personal information held by or on behalf of the Company or Share Registry. You can request access to your personal information by telephoning or writing to the Company through the Share Registry as follows: Mortgage Choice Limited

c/- ASX Perpetual Registrars Limited Locked Bag A14

Sydney South NSW 1235

Chairman’s letter

1

Key Offer information

6

1. Investment summary

7

2. Details of the Offer

13

3. Industry overview

19

4. Profile of Mortgage Choice

31

5. Corporate information

43

6. Financial information

47

7. Risk factors

61

8. Investigating

Accountants’ Report

67

9. Additional information

75

10. Glossary

89

Application Forms

93

Corporate directory

Contents

29 June 2004

Dear Investor

On behalf of the Board of Directors, it is my pleasure to invite you to become a Shareholder in Mortgage Choice, one of Australia’s largest mortgage brokers.

The first mortgage brokers in Australia began operating in the late 1980s and the industry has grown rapidly since that time. The role of a mortgage broker is to assist borrowers in choosing and applying for a home loan product which is suitable for their needs. The last 10 years has seen the emergence of non-bank mortgage providers and a proliferation of home loan products. As a result, the selection of the most appropriate lender and product has become an increasingly complex and time-consuming process for borrowers, fuelling a substantial increase in demand for mortgage broking services.

Mortgage Choice operates as a 370-strong franchised network comprising 537 selected mortgage brokers throughout Australia. Mortgage Choice licenses the use of the Mortgage Choice brand name and business systems and provides a range of support services to Franchisees. Mortgage Choice’s brokers are either Franchisees, or employees or consultants of the Franchisees. A key element of the Mortgage Choice business model is that it does not have products of its own. Rather, it offers over 200 home loan products drawn from our panel of 27 lenders.

The Mortgage Choice business model has proven to be very successful. The business became EBITDA positive in FY2002 as critical mass was achieved. Profits have grown substantially since then, primarily as a result of increasing revenues and a relatively fixed cost base. The low capital intensity of the business means that a high dividend payout ratio can be maintained even during periods of rapid growth.

Mortgage Choice is forecasting continuing growth in earnings in FY2004 and FY2005 notwithstanding a softening in new home loan approvals across the industry since November 2003. The Directors expect that earnings growth will be underpinned by growth in the Franchise network, increased loan volumes from the Franchisees recruited in the previous two years, increasing trailing commissions from Mortgage Choice’s loan book and further benefits from economies of scale.

Mortgage Choice now intends to list on ASX to allow the Selling Shareholders to realise part or all of their investments, create a liquid public market for the Shares, facilitate ownership of Shares by its Franchise network, staff and public investors, and provide access to equity capital markets for potential future growth opportunities (such as acquisitions). On completion of the Offer, the Founding Shareholders will hold approximately 44% of the issued Shares in the Company, after selling approximately 31% of their current holdings into the Offer. The Founding Shareholders have entered into voluntary escrow arrangements which will prevent them from selling any of their remaining shareholdings until after the release of the results for FY2005. This Prospectus contains detailed information about the Offer and the operations and performance of Mortgage Choice. I encourage you to read it carefully before making an investment decision.

Mortgage Choice is well positioned as one of the leading mortgage brokers in a growing industry. You now have an opportunity to participate in the future growth of the Company. I look forward to welcoming you as a Shareholder.

Over $15 billion loan book

At 31 December 2003, Mortgage Choice’s loan book stood at over $15 billion, making it one of the largest within

the mortgage broker market in Australia. Over 200 home loan products are available from our panel of 27

lenders. Trailing commissions provided approximately 40% of FY2003 revenue, making Mortgage Choice

less vulnerable to short-term fluctuations in demand for housing finance.

29% of all settled housing loans by value

in Australia in the first half of FY2004,

as Australians increasingly choose to use

mortgage brokers. The top five brokers,

including Mortgage Choice, now

account for over half the market.

a market leader

That is around 18% of all loans sourced through

brokers across Australia, making Mortgage Choice

a market leader.

Award-winning

business model

Mortgage Choice’s success is built on a

business model which couples a relatively

fixed cost base with extensive support for

its 370 Franchises (537 brokers). Our broker

network has more than doubled in the past three

and a half years, and we expect it to reach

more than 450 Franchises (700 brokers)

by 30 June 2005.

Best Franchise

System Award 2003

Home Based and

Mobile Greater

successful business model

it’s all about choice

motivated

profitable

Broker 2004

Australian Banking

and Finance

Magazine Awards

Key Offer Statistics

Offer Price

$1.05 per Share

Sale Shares to be sold by the Vendor under the General Offer

37.8 million

New Shares to be issued by Mortgage Choice under the Priority Offer

5.5 million

Total number of Shares in the Offer

43.3 million

Total Shares on issue on completion of the Offer

117.6 million

Market capitalisation at the Offer Price

$123.5 million

Enterprise value at the Offer Price

$121.6 million

Forecast

2005

Revenue

$106.5 million

Net profit after tax

$11.1 million

Earnings per Share (fully diluted)

9.5¢

Dividend per Share (fully franked)

8.4¢

PE multiple at the Offer Price (fully diluted)

11.1x

Dividend yield at the Offer Price

8.0%

Notes: 1 Assumes the exercise of the 2.2 million unlisted Options prior to the date of listing on ASX and 74,667 Shares issued to Existing Shareholders as detailed in section 9.11.

2 Enterprise value is the market capitalisation at the Offer Price less pro forma net cash of $1.9 million set out in the pro forma statement of financial position (refer section 6.8).

3 For the year ending 30 June. Refer to section 6.5.2 which sets out the assumptions underlying the Forecasts.

4 Diluted earnings per Share is calculated in accordance with AASB 1027 Earnings per Share using the weighted average number of Shares on issue (117.4 million). It assumes the exercise of the 2.2 million unlisted Options prior to the date of listing on ASX and 74,667 Shares issued to Existing Shareholders as detailed in section 9.11 and adjusts for entitlements under the executive and employee share plans (assuming that all performance criteria are met).

Important Dates

Prospectus date

Tuesday, 29 June 2004

Offer opens

Wednesday, 7 July 2004

Priority Offer closes

5.00pm Wednesday, 28 July 2004

Institutional and Broker Firm Offers close

5.00pm Tuesday, 3 August 2004

Issue and transfer of Shares and allocation announced

Wednesday, 4 August 2004

Shareholding statements expected to be dispatched

Thursday, 5 August 2004

Trading of Shares on ASX expected to commence

Tuesday, 10 August 2004

close the Offer early or extend the closing date of the Priority Offer, Institutional and Broker Firm Offers without notice, subject to the requirements of the Corporations Act and ASX Listing Rules. Investors are encouraged to submit their Applications as soon as possible after the Offer opens.

Key Offer information

How to invest

Applications to subscribe for or purchase Shares can only be made by completing and lodging a relevant Application Form contained in or accompanying this Prospectus or the relevant Application Form attached to the electronic version of this Prospectus.

Instructions on how to apply are set out in section 2 and are printed on the back of the Application Forms. Applications for Shares must be for at least 1,500 Shares ($1,575). Applications for more than 1,500

The information in this section is intended to be a summary only. It should be read in conjunction with the more detailed information appearing elsewhere in this Prospectus.

1.1

Business overview

Mortgage Choice was established in 1992 and operates a Franchise network which comprised 370 Franchises (537 brokers) located throughout Australia, as at 31 December 2003. Under a Franchise agreement, a Franchisee has the right to use the Mortgage Choice brand name and systems in a defined marketing territory. Some Franchisees also employ additional brokers within their business. Mortgage Choice provides support and services to its Franchise network in the form of training, marketing, advertising, back-office support, lead generation and information technology.

Mortgage Choice’s brokers advise borrowers on the range of home loan products available, assist them in the selection of a product that is suitable for their needs and submit loan applications on their behalf. The Company is focused on residential lending for owner-occupiers and investors.

Mortgage Choice originates home loans on behalf of a panel of 27 lenders. The Company and its Franchisees share origination and trailing commissions paid by lenders which are based on the value of loans originated by the Franchisees.

The business has grown rapidly in the past 10 years. There is potential to continue this organic growth, particularly in Victoria and Western Australia where Mortgage Choice is currently under-represented, as well as growth through acquisition if suitable targets arise.

1.2

Investment highlights

Market leader

Mortgage Choice is one of the largest mortgage brokers in Australia, writing 4.8% of all housing loans in the six months to 31 December 2003. Mortgage Choice’s loan book, defined as outstanding balances on loans it has originated, was over $15 billion as at 31 December 2003 – one of the largest loan books of any mortgage broker in Australia.

Successful business model

Mortgage Choice’s business is franchise based and the Company only offers loan products provided by third parties. Accordingly, relatively little capital is required to fund organic growth which is driven by the efforts of a nationwide network of ‘owner-managers’. Mortgage Choice brokers have access to over 200 home loan products from 27 lenders.

Strong growth prospects within a growing industry

Mortgage Choice is uniquely positioned as a leading mortgage broker in a growing and consolidating industry. The penetration of brokers in mortgage origination is increasing and brokers are now a key distribution channel for lenders, writing approximately 29% of all settled housing loans by value in Australia in the first half of FY2004. Mortgage Choice’s network has grown from 217 Franchises (248 brokers) as at 30 June 2000 to 370 Franchises (537 brokers) as at 31 December 2003, an increase of approximately 71% and 117% respectively. Mortgage Choice expects the network to have grown organically to more than 450 Franchises (700 brokers) by 30 June 2005. Expansion of the Franchise network together with improved productivity from recently recruited Franchisees (compared to their prior year performance) are expected to be key drivers of market share growth during the Forecast Period.

Franchise Network Size

Attractive financial performance

Mortgage Choice became EBITDA positive in FY2002 as critical mass was achieved. Net trailing commissions on the loan book now cover central overheads (excluding marketing) such that origination commissions (net of commissions paid to Franchisees and marketing costs) earned on new loan volumes flow directly to net profit. Revenue growth and economies of scale have resulted in significant profit generation and growth, a trend which is expected to continue over the Forecast Period, notwithstanding a softening in the housing finance market. In the five months since interest rates were increased by 0.5% per annum in November and December 2003, Mortgage Choice’s loan approvals have grown by 13% compared with the previous corresponding period.

Operating Revenue1

Operating Costs1

EBIT1

($ million) (% of operating revenue) ($ million)

Note: 1 Adjusted as specified in section 6.3.

2005F 2004F 2003 2002 2001 13.6 15.8 8.9 6.6 (4.0) Year to 30 June 2005F 24% 2004F 25% 2003 29% 2002 36% 2001 57% Year to 30 June Year to 30 June 2005F 2004F 2003 2002 2001 Year to 30 June

Source: Mortgage Choice. 40.4 57.4 75.7 101.2 106.5 2005F 2004F 2003 2002 2001 2000 Franchises

Source: Mortgage Choice.

Franchises Brokers Brokers As at 30 June 217 248 266 324 297 409 335 479 399 594 458 715

Increasing importance of high quality loan book revenues and earnings

Trailing commissions from Mortgage Choice’s loan book are more predictable and stable than origination commissions earned on new loans. Trailing commissions also generate higher margins than origination commissions. Trailing commissions have grown from $14.5 million (36% of operating revenue) in FY2001 to $30.3 million (40% of operating revenue) in FY2003, and are forecast to reach $50.9 million (48% of operating revenue) by FY2005. In FY2005, the loan book is expected to grow by $2.7 billion, comprising new loans written of $7.9 billion less run-off of $5.2 billion from existing loans.

Mortgage Choice Loan Book Trailing Commission Revenue1

($ million) (% of total operating revenue)

Source: Mortgage Choice

Note: 1 Adjusted as specified in section 6.3.

Experienced Board and management team

The Directors and senior management have a broad range of skills and commercial experience. The non-executive Directors have significant experience in managing successful Australian businesses, with particular strengths in financial services and franchising. The Founding Shareholders (Peter Higgins and Rodney Higgins), responsible for establishing the business and its growth strategy, remain on the Board.

Attractive dividend yield

The Directors expect that the Company will be in a position to pay fully franked dividends totalling 8.4 cents per Share for FY2005. The expected dividend yield for FY2005 (Mortgage Choice’s first full financial year following listing) is 8.0% based on the Offer Price. The dividends in relation to FY2005 are expected to be paid in April and November 2005 in the ratio of approximately 45%/55% (interim/final).

2005F 2004F 2003 2002 2001 47.8% 41.2% 40.0% 37.8% 36.0% Year to 30 June 2005F 2004F 2002 2003 2001 2000 20,150 17,424 13,107 9,628 6,636 CAGR 36.9% 4,193 As at 30 June

1.3

Selected summary financial information

The table below summarises Mortgage Choice’s adjusted historical financial information for FY2001, FY2002 and FY2003 and the forecast financial information for FY2004 and FY2005. More detailed financial information is contained in section 6.

FY2001 FY2002 FY2003 FY2004 FY2005 Adjusted Adjusted Adjusted Pro forma

($000) Historical1 Historical1 Historical1 Forecast2,3 Forecast3

Operating revenue 40,352 57,445 75,727 101,224 106,480

EBITDA (3,135) 7,421 9,884 14,532 16,673

EBIT (3,950) 6,639 8,916 13,624 15,805

NPAT (3,978) 5,909 6,363 9,879 11,132

Notes: 1 The historical financial information has been adjusted for non-recurring items as detailed in section 6.3.

2 Based on audited results for the six months to 31 December 2003 adjusted for a non-recurring item detailed in section 6.3 and forecast performance for the six months ending 30 June 2004.

3 For details of the assumptions underlying the Forecasts, refer to section 6.5.

1.4

Dividend policy

FY2005 dividends are expected to total 8.4 cents per Share fully franked, which represents a payout ratio of 89% of forecast NPAT. The first half year dividend is expected to be paid in April 2005. No dividends will be payable to New Shareholders for FY2004. Subject to future business conditions and opportunities and the future cash flow requirements of the Company, the Directors intend to maintain a dividend payout ratio in the range 85% to 100% with all dividends expected to be fully franked. The low capital requirement of the Mortgage Choice business model means that Mortgage Choice can maintain a high payout ratio even during periods of rapid growth in its business.

Notwithstanding the above comments, the ability to declare and pay dividends and the level of franking of dividends will depend on a number of factors, including earnings, cash resources and the risk factors discussed in section 7, many of which are beyond the control of both Mortgage Choice and the Directors. Therefore, the Directors do not provide any assurance about the level of future dividends nor the extent to which any of the dividends will be franked.

1.5

Risk factors

There are a number of factors both specific to Mortgage Choice and of a general nature that may affect the future operating and financial performance of Mortgage Choice and the outcome of an investment in Mortgage Choice. A description of those risk factors is set out in section 7.

There can be no guarantee that Mortgage Choice will achieve its stated objectives, that the Forecasts will be met or that forward-looking statements will be realised. Before deciding to invest in Mortgage Choice, potential investors should read this Prospectus in its entirety and in particular should consider the assumptions underlying the Forecasts in section 6 and the risk factors in section 7 that could affect the operating and financial performance of Mortgage Choice.

2.1

Key dates

Prospectus date Tuesday, 29 June 2004

Offer opens Wednesday, 7 July 2004

Priority Offer closes 5.00pm Wednesday, 28 July 2004

Institutional and Broker Firm Offers close 5.00pm Tuesday, 3 August 2004

Issue and transfer of Shares and allocation announced Wednesday, 4 August 2004

Shareholding statements expected to be dispatched Thursday, 5 August 2004

Trading of Shares on ASX expected to commence Tuesday, 10 August 2004

Note: 1 These dates are indicative only and may change. All times are AEST. Mortgage Choice in consultation with the Underwriter, has the right to close the Offer early or extend the closing date of the Priority Offer, Institutional and Broker Firm Offers without notice, subject to the requirements of the Corporations Act and ASX Listing Rules. Investors are encouraged to submit their Applications as soon as possible after the Offer opens.

2.2

Description of the Offer

This Prospectus invites investors to apply for a total of 43.3 million Shares which will represent approximately 37% of Mortgage Choice’s issued Shares at completion of the Offer. The Shares are being offered at the Offer Price of $1.05 per Share.

The Offer comprises:

the sale of 37.8 million Sale Shares by the Vendor; and

the issue of 5.5 million New Shares by Mortgage Choice.

Further details of arrangements between the Vendor, the Company and Selling Shareholders in relation to the Sale Shares are set out in section 9.3.

2.3

Purpose of the Offer

The purpose of the Offer is to:

allow the Selling Shareholders to realise part or all of their investments;

create a liquid public market for the Shares on ASX and broaden the Shareholder base;

provide employees and Franchisees with an opportunity to become Shareholders; and

provide Mortgage Choice with access to equity capital markets to facilitate potential future growth

opportunities (such as acquisitions) and provide a wider range of capital management alternatives. The gross proceeds from the Offer will total approximately $45.5 million of which $5.8 million will be received by Mortgage Choice, assuming that the Priority Offer to Eligible Employees and Eligible Franchisees (see section 2.8) is fully subscribed. The balance of the proceeds will form the consideration for the sale of the Sale Shares by the Vendor. Approximately 87% of the costs of the Offer will be borne by the Selling Shareholders. Mortgage Choice will pay the remaining costs of the Offer (see sections 9.3 and 9.14).

2.4

Ownership structure

The ownership structure of Mortgage Choice immediately prior to and at the completion of the Offer is shown in the table below:

Pre-Offer At Completion of the Offer1

Shares % Shares %

Interests associated with Rodney Higgins 38,515,000 35.1 26,841,583 22.8

Interests associated with Peter Higgins 36,959,950 33.7 25,286,534 21.5

St.George Wel Limited 10,500,000 9.6 – –

Thorney Holdings Pty Limited 5,000,000 4.6 3,000,000 2.6

Australian Central Credit Union Limited 3,000,000 2.7 3,000,000 2.6

Australian National Credit Union Limited 3,000,000 2.7 3,000,000 2.6

Credit Union Australia Limited 3,000,000 2.7 3,000,000 2.6

Other Existing Shareholders 9,855,050 9.0 7,860,050 6.7

Unlisted Optionholders2 _{– – 2,196,600 1.9}

New issue to Existing Shareholders3

– – 74,667 0.1

New Shareholders4

– – 43,333,333 36.9

__________________________________ ___________________________________

Total 109,830,0005 _{100.0 117,592,767 100.0}

Notes: 1 Sell down amounts of Existing Shareholders may increase by up to 4.3 million Shares under certain circumstances as detailed in section 2.10. 2 Assumes the exercise of the 2.2 million unlisted Options prior to the date of listing on ASX.

2.5

Structure of the Offer

There are two components to the Offer:

the General Offer consisting of:

– a Broker Firm Offer, open to Australian resident retail investors who have received a firm allocation from the Underwriter or a Co-Manager; and

– an Institutional Offer which is open to certain institutional investors; and

the Priority Offer open to Mortgage Choice’s Eligible Employees and Eligible Franchisees as described in

section 2.8.

2.6

Broker Firm Offer

The Broker Firm Offer is only open to Australian resident retail investors who have received a firm allocation from the Underwriter or a Co-Manager. The Broker Firm Offer opens 9.00am on 7 July 2004 and closes 5.00pm on 3 August 2004. Mortgage Choice, in conjunction with the Underwriter, reserves the right to vary the closing date of the Broker Firm Offer without notice.

Applicants who have been offered a firm allocation by the Underwriter or a Co-Manager will be treated as a Broker Firm Applicant in respect of that allocation. Broker Firm Applicants should complete and lodge the orange General Application Form, together with a cheque(s) for the Application Monies, in accordance with the instructions of the Co-Manager from whom the firm allocation of Shares was received.

Broker Firm Applicants should not send their General Application Forms to the Share Registry.

If you elect to participate in the Broker Firm Offer through the Underwriter or a Co-Manager, that Underwriter or Co-Manager will act as your agent in submitting your General Application Form and in depositing Application Monies into the designated Applications account. The Underwriter or Co-Managers are responsible for ensuring that there are available funds in the Applications account. The Company, the Vendor, the Share Registry and the Underwriter take no responsibility for any acts or omissions by a Co-Manager in connection with your Application, General Application Form or Application Monies.

Applications under the Broker Firm Offer must be for a minimum 1,500 Shares ($1,575) and thereafter in multiples of 500 Shares ($525).

2.7

Institutional Offer

The Institutional Offer is only open to institutions. Mortgage Choice, in conjunction with the Underwriter, reserves the right to vary the closing date of the Institutional Offer without notice.

Application procedures for institutional investors will be advised by the Underwriter.

Mortgage Choice and the Underwriter will determine the allocation of Shares amongst applicants in the Institutional Offer. Mortgage Choice and the Underwriter have absolute discretion regarding the basis of allocation of Shares, and there is no assurance that any applicant will be allocated any Shares, or the number of Shares for which they have applied.

2.8

Priority Offer

The Priority Offer is only open to Eligible Employees and Eligible Franchisees. The Priority Offer opens 9.00am on 7 July 2004 and closes 5.00pm on 28 July 2004. Approximately 5.5 million New Shares have been reserved for the Priority Offer. Under the Priority Offer, Eligible Employees and Eligible Franchisees are offered priority on their Applications for up to the number of New Shares as determined by the Directors at their discretion (Priority Allocation). The Priority Allocation for each Eligible Franchisee has been determined by reference to the length of time an Eligible Franchisee has been with Mortgage Choice and the size of the Eligible Franchisee’s loan book as at 30 April 2004. The Priority Allocation for each Employee has been set at 11,000 New Shares. The number of New Shares making up the Priority Allocation will be notified to each Eligible

Under the Priority Offer, Eligible Employees and Eligible Franchisees may apply for New Shares at $1.05 per Share. Applications for New Shares under the Priority Offer must be for a minimum of 1,500 Shares ($1,575). Applications for more than 1,500 Shares must be in multiples of 500 Shares ($525). No brokerage or stamp duty is payable by Eligible Employees or Eligible Franchisees.

Applications under the Priority Offer can be made by completing and submitting the personalised blue Priority Application Form in accordance with the instructions set out on the back of that form. Eligible Employees and Eligible Franchisees must use that Priority Application Form to ensure their Application for the New Shares is treated as one made under the Priority Offer.

Completed Priority Application Forms must be accompanied by a cheque(s) in Australian dollars drawn on an Australian branch of an Australian bank. Cheques should be crossed ‘not negotiable’ and made payable to ‘Mortgage Choice Limited Share Offer’.

Completed Priority Application Forms and accompanying cheques should be mailed or delivered to:

Mailed to: Delivered to:

Mortgage Choice Share Offer Mortgage Choice Share Offer

ASX Perpetual Registrars Limited ASX Perpetual Registrars Limited

Locked Bag A14 Level 8, 580 George Street

Sydney South NSW 1235 Sydney NSW 2000.

Completed Priority Application Forms must be received by the Share Registry no later than 5.00pm on 28 July 2004. Completed Priority Application Forms should not be sent to Mortgage Choice. An Application constitutes an irrevocable offer to purchase Sale Shares or apply for New Shares on the terms and conditions set out in this Prospectus.

2.9

Validity of Application Forms

An Application Form may only be distributed with, attached to, or accompany a complete and unaltered copy of this Prospectus. Application Forms included with or accompanying this Prospectus contain a declaration that the investor has personally received the complete and unaltered Prospectus prior to completing the Application Form.

Mortgage Choice will not accept a completed Application Form if it has reason to believe that the Applicant has not received a complete copy of this Prospectus or if it has reason to believe that the Application Form has been altered or tampered with in any way.

2.10 Allocation policy

Applicants who have been offered a firm allocation of Shares by the Underwriter or a Co-Manager and who participate through the Broker Firm Offer will be allocated the full number of Shares they apply for. A pool of New Shares has been set aside exclusively for the Priority Offer. Initially, these Shares will be allocated so as to ensure that all Eligible Employees and Eligible Franchisees in the Priority Offer receive the number of Shares subscribed for up to their predetermined Priority Allocation. To the extent that there are additional New Shares available after this initial allocation is made, Eligible Employees and Eligible Franchisees who have applied for more than their predetermined Priority Allocation of Shares will have a priority entitlement to any additional New Shares.

To the extent that Eligible Employees and Eligible Franchisees do not apply for the total 5.5 million New Shares to be offered under the Priority Offer, the remaining New Shares will be available to be allocated to investors in the General Offer.

In the event that Applications in the Priority Offer exceed the approximately 5.5 million New Shares available under that part of the Offer, the Company reserves the right to request CSL to offer to sell or procure the sale of up to 4.3 million further Shares at $1.05 per Share to meet this demand. If CSL complies with this request,

2.11 Acceptance of Applications

Mortgage Choice, in consultation with the Underwriter, reserves the right to:

reject any Application, including Applications that have not been correctly completed, are not accompanied

by payment, or are accompanied by cheques that are dishonoured;

in relation to the General Offer, allocate any lesser number, or to decline any Application; or

allocate to any Applicant in the Priority Offer a lesser number of Shares than that Applicant applied for,

but no less than the number of Shares that is their initial Priority Allocation.

2.12 Underwriting

All 43.3 million Shares offered under this Prospectus have been underwritten by the Underwriter at the Offer Price. A summary of the Underwriting Agreement, and the circumstances under which the Underwriter’s obligations will cease, is set out in section 9.5.

2.13 Rights attaching to Shares

The Sale Shares and the New Shares will rank equally with all other Shares following transfer and allocation. The rights attaching to Shares are detailed in the Constitution. A summary of the rights attaching to the Shares is set out in section 9.1.

2.14 Application Monies and refunds

Application Monies received will be held in bank accounts for Applicants pending transfer and allotment of the Shares offered under this Prospectus (or until Application Monies are refunded if the Offer does not proceed). Where no allocation is made or where the number of Shares allocated is less than the number applied for, surplus Application Monies will be refunded. Interest will not be paid on refunded Application Monies and any interest earned on Application Monies pending allocation or refund will become an asset of the Company.

2.15 Taxation

Taxation consequences of any investment in Shares will depend upon each investor’s circumstances. Investors should make their own enquiries about the taxation consequences of an investment in the Company. If investors are in doubt as to the course of action they should take, they should consult a lawyer, accountant, stockbroker or other professional adviser.

2.16 ASX listing

Application will be made to ASX no later than seven days after the date of this Prospectus for the Company to be admitted to the official list of ASX and for official quotation of the Shares offered by this Prospectus. If Mortgage Choice is not admitted to the official list of ASX within three months after the date of this Prospectus, all Application Monies will be refunded without interest.

ASX takes no responsibility for this Prospectus or the investment to which it relates. Admission to the official list of ASX is not to be taken as an endorsement by ASX of Mortgage Choice.

It is expected that Shares will be transferred or issued to successful Applicants on 4 August 2004 and that normal trading of Shares on ASX will commence on 10 August 2004. Mortgage Choice, in consultation with the Underwriter, has the right to change these dates.

2.17 Electronic Prospectus

This Prospectus may be viewed online at www.mortgagechoice.com.au. Applicants using the Application Forms attached to the electronic version of this Prospectus must be located in Australia.

Persons who receive the electronic version of this Prospectus should ensure that they download and read the entire Prospectus. A paper copy of this Prospectus will be provided free of charge to any person who requests a copy by contacting the Share Registry, by mail or on 1800 054 388, during the Offer period.

2.18 CHESS and shareholding statements

The Company will apply to participate in CHESS in accordance with the ASX Listing Rules and the SCH Business Rules.

Following the transfer of Sale Shares and issue of New Shares to successful Applicants, Shareholders will be sent an initial statement that sets out the number of Shares which they have been allocated in the Offer. This statement will also provide details of a Shareholder’s Holder Identification Number or, where applicable, the Securityholder Reference Number for Issuer Sponsored Holders. It is the responsibility of Applicants to determine their allocation prior to trading in Shares. Shareholders will receive subsequent statements showing changes to their shareholding in the Company. Certificates will not be issued.

2.19 Overseas investors

The distribution of this Prospectus in jurisdictions outside Australia may be restricted by law, and therefore persons into whose possession it comes should seek advice and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of those laws.

This Prospectus does not constitute an offer or invitation to subscribe for or purchase Shares in any jurisdiction where, or to any person to whom, it would be unlawful to issue this Prospectus.

It is the responsibility of any Applicant who is resident overseas to ensure compliance with all laws of any country relevant to their Application. The return of a duly completed Application Form will be taken by the Company to constitute a representation or warranty made by the Applicant to the Company that there has been no breach of such laws and that all necessary approvals and consents have been obtained.

The Shares have not been and will not be registered under the US Securities Act of 1933 and may not be offered or sold in the United States or to, or for the account or benefit of, a US Person (as defined in regulations pursuant to the US Securities Act of 1933) except in transactions exempt from the registration requirements of the US Securities Act of 1933.

2.20 Withdrawal

The Directors may at any time decide to withdraw this Prospectus and the Offer, in which case the Company will return all Application Monies as soon as practicable. No interest will be paid on any Application Monies refunded as a result of the withdrawal of this Prospectus.

2.21 Enquiries

If investors require assistance to complete the Application Forms or require additional copies of this Prospectus, they should contact either the Share Registry, ASX Perpetual Registrars, on 1800 054 388 or a stockbroker. If investors are in any doubt as to whether to invest in Mortgage Choice, they should contact a lawyer, accountant, stockbroker or other professional adviser.

3.1

Australian housing finance market

Overview

The Australian housing finance market is generally defined and analysed based on the number and value of lending commitments, which are approvals for housing finance. On this basis, the new loan market approached $170 billion in FY2003, following a 19-year period of compound annual growth of 15.3% per annum. Over the two years ended 30 June 2003, the market experienced significant growth with the total value of home loan commitments increasing by an average of almost 26.9% per annum. The growth in the housing finance market has been fuelled in recent years by various factors, including a stable low interest rate environment, an increase in investment property loans and sustained growth in housing prices.

Interest rates on mortgages are a key driver of the housing finance market as they impact the borrower’s ability to service the loan. The long-term average mortgage interest rate (standard variable) over the past 45 years has been approximately 9% per annum. Since its peak in March 1990 at 17% per annum, the average variable mortgage interest rate has trended downwards, supporting the recent growth in the mortgage market. Interest rates have stabilised at levels between 6.05% per annum and 8.05% per annum in the last seven years and, despite an increase in the cash rate of 0.5% per annum in the final two months of 2003, average variable mortgage interest rates remain at levels which are low by historical standards.

Housing Finance Market and Mortgage Interest Rates: 1984-2005F

Source: ABS, Reserve Bank of Australia and Mortgage Choice forecasts for FY2004 and FY2005.

A number of other factors have also contributed to growth in the housing finance market. These include:

consistent population growth. Australia’s population has grown from 16.3 million in June 1987 to over

20 million in January 2004;

a reduction in the average number of occupants per dwelling, from 3.3 in 1971 to 2.6 in 2001, which

increased overall demand for dwellings;

0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004F 2005F 0 2 4 6 8 10 12 14 16 18 20

Average variable mortgage interest rate per annum (%)

Investment Owner-occupied Average mortgage interest rate Year to 30 June

$ million

Average mortgage interest rate in 1990 almost 17% Introduction of GST Financial deregulation completed Establishment of Mortgage Choice Late 1980s property 'boom_'

a change to capital gains tax legislation in September 1999, which increased the attractiveness of investing in property;

the introduction of the First Home Owners Grant. In July 2000, the Australian Government introduced

a $7,000 grant for first home owners, which was subsequently raised to $14,000 in March 2001 (in relation to new homes) before being scaled back to $7,000 in December 2001;

deregulation of the financial services market, resulting in increased competition amongst suppliers

of mortgages (e.g. emergence of specialist non-bank mortgage managers) leading to a greater product range, lower margins (and mortgage interest rates) and easier access to finance for consumers; and

an increased willingness amongst consumers to take on debt to purchase housing.

Owner-occupied loans

Demand for owner-occupied dwellings is underpinned by Australia’s relatively high level of home ownership by international standards, with owner-occupied dwellings fluctuating between 65% and 70% of all occupied dwellings in Australia.

Owner-occupied loans represented 66% of the housing finance market in FY2003. Growth in the owner-occupied loan market, which has historically been the focus of Mortgage Choice’s business, was 11.3% per annum over the past decade and compound growth in the past two years to June 2003 was 20.1% per annum. This growth is attributable to increases in both average loan size and the number of loan approvals. During the decade, the average loan size more than doubled from an average of around $81,100 in FY1993 to $169,200 in FY2003, representing a 7.6% compound annual growth rate. Over the two years to June 2003, the average loan size increased approximately 12.2% per annum.

Average Loan Size (owner-occupied): 1993-2003

Source: ABS.

The number of owner-occupied loan approvals over the four years to 30 June 2003 is significantly above the average number of owner-occupied loan approvals observed over the period from 1985 to 2003, indicating fundamental growth in the underlying market.

0 50 100 150 200 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

Average loan size – all loans Average loan size – first home owner Year to 30 June

Loan Approvals (owner-occupied): 1985-2003

Source: ABS.

Within the owner-occupied segment, the purchase of established dwellings is the largest segment, although refinancing of established dwellings has grown at the fastest compound rate over the past decade, and was the fastest growing component in FY2003 (38.4% growth over FY2002). This market segment is sizeable, reaching $25 billion in FY2003.

Owner-occupied Lending by Type: 1993-2003

Source: ABS. 0 10,000 20,000 30,000 40,000 50,000 60,000 $ million 70,000

Purchase of new dwellings (CAGR 7%) Alterations and additions (CAGR 12%) Construction of new dwellings (CAGR 5%)

Refinance of established dwellings (CAGR 19%) Purchase of established dwellings (CAGR 11%)

2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993

Year ended 30 June 0 100 200 300 400 500 600 700

Total number of approvals Refinancing of established dwellings

2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 Number of approvals (000)

First home buyer loans

First home buyers have recently been ‘crowded out’ of the housing market and are at an all time low as a percentage of total owner-occupied mortgage transactions. Increasing house prices in most parts of Australia (leading to higher mortgage borrowings to facilitate a typical purchase) have seen affordability for first and other home buyers decline. Although the absolute number of first home buyers in FY2003 of 99,281 was relatively close to the average of 107,100 observed over the period from FY1992 to FY2003, the total number of owner-occupied transactions in the market has increased, causing first home buyers to represent a lower percentage of the total.

Some of the recent decrease in first home buyer volumes may have been caused by a ‘pull forward’ effect of first home owner demand pursuant to the introduction of the First Home Owners Grant in July 2000 and the subsequent increase in March 2001.

First Home Buyers: 1992-2003

Source: ABS.

The Productivity Commission has analysed the problems faced by first home buyers in entering the current Australian property market. The final report was submitted to the Australian Government in March 2004 and released to the public in June 2004.

A number of state governments in their recent budgets have offered concessions to first home buyers in an attempt to stimulate this component of the property market.

0 20 60 40 120 100 80 160 140

Average first home buyers – dwellings financed (1992-2003) 107,100 Average percentage (1992-2003) 21.2% 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992

First home buyers – dwellings financed (000) First home buyers (% of all dwellings financed)

First home buyer – dwellings financed (No.) First home buyers (% of all dwellings financed) Year ended 30 June

0% 5% 10% 15% 20% 25%

House Prices: Rates of Growth 1987-2003 (Quarterly)1

Note: 1 Change on prior year corresponding quarter. Source: ABS and Mortgage Choice analysis.

Investment property loans

Investment property loans accounted for 33.8% of the housing finance market in FY2003, compared to 14.3% in FY1993. Investment property loans have enjoyed strong compound growth of 24.5% per annum over the past decade, with compound annual growth in the two years to June 2003 of 44.2% per annum. The recent growth coincided with beneficial Australian Government changes to capital gains tax legislation for investors and a period of underperformance in the equity capital markets. However, in NSW a duty charged on the sale of investment properties has recently been introduced which may adversely impact the investment property market in NSW.

3.2

Market outlook

The housing finance market has continued to demonstrate strong growth during the first half of FY2004 with total housing finance approvals (owner-occupied and investment) of $108.5 billion compared to $80.5 billion in the first half of FY2003, representing growth of 34.7%.

On a monthly basis, housing finance approvals reached a historical peak in October 2003 (approvals, including refinancing, totalling $19.3 billion). It has moderated since then following the lifting of cash rates by the Reserve Bank of Australia in November and December 2003 by a total of 0.5% per annum. However, the level of housing finance approvals in each month between November 2003 and April 2004 was higher than the previous corresponding period.

Mortgage Choice expects the housing finance market to experience a ‘soft landing’ with monthly approvals to continue to soften in the second half of FY2004 and in FY2005. Based on a strong first six months, the market is expected to reach $201 billion of new loan approvals in FY2004 (18.8% growth on FY2003). The slowdown currently being experienced is expected to continue into FY2005, leading to a 14.3% decline in the market to $172 billion of new loan approvals. Notwithstanding this decline, the market is expected to remain at levels which are high by historical standards.

Weighted average of 8 capital cities Quarter ended 30 June

Brisbane Median (weighted average of 8 capital cities) Average (weighted average of 8 capital cities) Melbourne Sydney 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987

Weighted average growth exceeded 10% in Sep 01 quarter for the first time since Dec 89

Negative growth in Brisbane as recently as Sep 99 -10% 0 10% 20% 30% 40% 50% 60%

Maximum weighted average growth of 4.8% between 1990 and 1996 Sharp property price rises in late 80s

Mortgage Market System ‘Stock’ Growth ($ billion)

Source: Mortgage Choice, ABS.

In reaching their view on the outlook for the housing finance market, the Directors have been cognisant of the following:

economists are not predicting sharp interest rate rises, with the consensus forecasting perhaps one more

increase of 0.25% per annum during calendar year 2004. Thus, the recent period of interest rate stability in Australia is expected to continue throughout the Forecast Period;

many banks and market analysts are forecasting system growth (growth in the total value of loans in the

market as a whole) within a range of 10% to 20% for FY2004, slowing in FY2005;

refinancing activity has been increasing and comprised 24.8% of all owner-occupied loans by value in the

first half of FY2004 (compared to 22.7% for FY2003);

the population is projected to continue to grow steadily. The ABS has forecast a population of 22.3

to 24.5 million by 2021 in comparison to the current level of 20 million, thus providing a solid demographic underpinning longer-term demand for property and housing finance; and

affordability is at an all time low according to various affordability indices, causing difficulty for first time home buyers to access the housing market (however, recent concessions provided to first home buyers in a number of state budgets may mitigate this effect).

3.3

Mortgage market participants and trends

The mortgage market and its participants have changed significantly over the past decade. Prior to the completion of financial deregulation in the mid-1980s and the establishment of the non-bank sector in the mid-1990s, a mortgage customer was typically serviced by a major bank providing all elements of the mortgage process from origination (finding the customer) to servicing (ongoing queries, statements, payment collections etc).

However, deregulation together with the opportunity presented by the high interest rate products offered by traditional lenders allowed a range of new non-bank mortgage providers to secure a significant share of the home loan market through the second half of the 1990s. This resulted in significantly increased competition in the mortgage market and an expanded range of available mortgage products.

As a result, the market has evolved and segregated along functional lines with specialist operators emerging within different elements of the mortgage ‘value chain’. In housing loan origination, four main groups have developed: banks, mortgage brokers, mortgage managers and building societies/credit unions.

494.4 200.8 (108.3) 586.9 586.9 656.2 (102.8) 172.1 11.8% growth 18.7% growth Closing balance FY2004 Refinancings/ repayments New loans Opening balance FY2004 Closing balance FY2005 Refinancings/ repayments New loans Opening balance FY2005

Traditionally, the funding of the mortgage market was dominated by the banks and, to a lesser extent, building societies. However, the market share of the banks (by volume of transactions) has decreased from a peak of 90.1% in 1994 to 74.5% in 2003 primarily in favour of mortgage managers/ securitisers which have a 15.4% market share. The increasing influence of mortgage brokers (which originated approximately 29% of all settled housing loans by value in Australia in the first half FY2004) has not directly affected the ultimate market share of traditional lenders as the brokers’ business is placed with banks or other lenders.

Market Share by Type of Lender: 1985-2003

Source: ABS.

Note: Wholesale lenders tracked only since July 1995.

Whilst mortgage customers traditionally focused largely on headline interest rates, customers now have an array of mortgage product features to assess within a mortgage. The complexities and breadth of the Australian mortgage market have underpinned the consequent expansion of the mortgage broking industry, as consumers seek assistance in selecting a loan from the wide range of products available in the competitive home finance market. In addition, consumers value the convenience of the broker service, whereby they receive assistance at a time (e.g. evenings, weekends) and place (e.g. home, work) of their choosing, and are given the opportunity to ‘shop around’ for a mortgage without having to visit multiple lenders.

Mortgage brokers generally focus exclusively on the origination of mortgage business (i.e. introduction of customers to a lending institution) typically for a wide range of financial institutions, and have no exposure to the other segments of the mortgage market (such as funding or ongoing servicing). There are, however, considerable variations in practice and the extent to which they assess the customer’s personal and financial circumstances in order to determine which product to recommend.

In comparison, although mortgage managers are also effectively third parties introducing business to lending institutions, there are significant differences between mortgage managers and brokers. Mortgage managers typically have arrangements with wholesale lenders to distribute their funds, via individually packaged home loans (generally branded differently from the name of the wholesale funder). The mortgage manager will arrange for the completion of a loan application and, once the loan is approved and disbursed, the mortgage manager will typically continue to administer the loan on behalf of the lender. The typical mortgage manager generally utilises funds from only one or two lending institutions including securitisers. Some mortgage managers also operate as brokers in that they solicit loan applications which they forward to lenders other than those for whom they manage the loans.

0 20 40 60 80 100 Other Wholesale lenders Permanent building societies

Banks 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 Min: 65% in 1985 Max: 90% in 1994 2003: 75%

Year ended 30 June

Market Share (%)

3.4

The mortgage broking industry

Overview

The mortgage broking industry has grown rapidly since the first brokers were established in the late 1980s. In FY2003 housing loan settlements originated through mortgage brokers represented approximately $40 billion and the industry now represents a significant component of the mortgage market value chain. The increasing market share enjoyed by the mortgage broking industry reflects the service and benefits that brokers provide to customers:

convenience of meeting at a time and place of the customer’s choosing;

assistance in selecting a mortgage from the complex and extensive range of available loans;

reduced administrative burden in selecting and obtaining a loan; and

no direct charge typically made for the advice.

Key statistics on the mortgage broking industry in Australia include:

There are approximately 2,000 broker entities in Australia, of whom 467 are active. Active brokers are

defined as brokers which have written at least three loans in the past quarter. However, the number of individuals acting as brokers is significantly larger as each broker entity may employ a number of loan writers. For example, Mortgage Choice will count as one broker entity;

Brokers have originated as much as 29% of the value of all home loans written in Australia in a given quarter.

Quarterly mortgage settlements generated by brokers in the December 2003 quarter were a record

$13.3 billion; and

The average loan size for mortgage broker generated home loans is higher than the overall market average.

Source: Market Intelligence Strategy Centre (MISC).

Whilst there are a large number of small operators in the mortgage broking industry, the industry has become more concentrated over recent years. The top five mortgage brokers now account for over 55% of the mortgage broking industry, compared to just over 30% less than three years ago. The industry is still fragmented with the top 100 mortgage brokers accounting for 93% of the mortgage broking industry; however, it is expected to become more concentrated over time.

Over the past three years, the mortgage broking industry has experienced an upward trend in market share to approximately 29%.

Role of brokers

Mortgage brokers source loan applications on behalf of financial institutions that wish to offer residential mortgages to customers. The brokers obtain information about the customer’s needs and financial position and then survey the products available from their lender panel in order to assist in selecting a loan that is most suitable based on a customer’s particular needs.

The core activities of a mortgage broker include lead generation, assessment of the customer’s needs, selection of a suitable product, submission of the application and management of the process until completion.

Illustrative Broker Activities

The choice of a mortgage is usually based on more than just the headline interest rate. A number of other features will typically contribute to the broker’s recommendation and the customer’s final decision. These features could include fixed or variable rate, special introductory offers, borrowing capacity, availability of offset accounts/redraw facilities, ability to approve/settle within a specific timeframe and brand preference. While some brokers draw on a lending panel with more than 15 institutions (and a much greater number of products), others operate with a substantially smaller lender panel. Mortgage Choice offers over 200 home loan products drawn from a panel of 27 lenders.

Business models

A number of business models are utilised in the mortgage broking industry:

franchise model: a franchisor assigns to independent people (franchisees or brokers) the right to market

and distribute the franchisor’s branded service and to use the business name for a fixed period of time;

aggregator model: individual brokers own their own businesses and trade under their own brand name,

but utilise the wholesale lender panel agreement of an operator who ‘aggregates’ (or combines) the business volumes of a large number of brokers;

consultancy model: loan writers are employed by a single branded employer which generally pays a mix

of salary and commissions; and

sole trader model: the owner and the broker are one and the same, hence an individual operator will

have direct commercial relationships with a panel of lenders.

There are fundamental differences in these business models which centre on two key areas:

the level of operational support provided to the brokers; and

the amount of commission payable to the broker.

Lead generation

Market and advertise to identify customers looking

for a mortgage (e.g. advertisements, seminars, newsletters)

Referrals from real estate agents, lawyers, accountants, other

business advisers

Referrals and repeat business from existing customers

Interview customer and review relevant information

Explain mortgage features of importance to customer

Pre-qualify the potential application using software and present choice of possible loans

Complete all relevant forms

Submit the application

Provision of all required information

Project management to completion

Answer customer queries

Liaise with lender to ensure timetable is on track

and provision of further information as required

Customer satisfaction /

further lead generation

A positive initial experience coupled with quality

service throughout the life of the loan increases the probability that the customer will become a repeat user of mortgage broker services

customer's needs

Application submission

Franchises and aggregators represent the dominant business models in the broking sector with 31% and 30% market share respectively.

Typically, brokers generate revenue via commission fees received from the lenders to whom they introduce mortgage customers (although there is no regulatory or other restriction on the ability to also charge fees to customers). Fees received by brokers typically comprise two components:

an origination commission based on the dollar value of the mortgage settlement; and

a trailing commission paid monthly throughout the life of the loan based on the balance outstanding.

In some cases, bonuses can be earned where the volume and business placed with a lender meets or exceeds specified targets. The commercial arrangements between brokers and each lender on their lender panels vary.

3.5

Regulation of the mortgage broking industry

Currently, there is no comprehensive national (or nationally consistent) regulation of the activities of finance brokers. Federal legislation deals with broad obligations relating to misleading and deceptive conduct; however, it relies on the states for more specific regulation. Broker-specific legislation exists in NSW, Victoria, ACT and Western Australia. Brokers are subject to minimum disclosure obligations in these states when making recommendations about credit products. Self-regulation has prevailed through the Mortgage Industry Association of Australia (MIAA). MIAA members are bound by a code of practice and subject to disciplinary action, up to membership cancellation, if the code is breached. A number of banks now prefer to deal with brokers which have MIAA certification.

The introduction of the Financial Services Reform Act 2001 (Cth) required entities that deal or provide advice in relation to financial products to hold an Australian Financial Services Licence. Two products advised by mortgage brokers were impacted by the new legislation – offset accounts and deposit accounts (which form part of certain loan packages offered by lenders). In December 2003, ASIC granted an exemption in relation to offset accounts. In respect of deposit accounts, non-licensed operators are limited to only providing strict factual information in respect of these accounts to customers.

A summary of the legislative environment applicable to mortgage brokers, and proposals for reform, is set out in section 9.9.

Mortgage Choice believes that a tighter regulatory environment may act as a barrier to entry to the mortgage broking sector and, potentially, a catalyst for consolidation amongst existing players, particularly smaller operators lacking a strong back-office system or economies of scale.

3.6

Information technology

Information technology is poised to play a significant role in the mortgage broking industry. Mortgage brokers’ interaction with lenders in relation to submission of loan applications is currently largely a paper-based, manual process. This causes operational inefficiencies and bottlenecks within lenders’ back offices and inhibits productivity amongst brokers.

In light of the need for a sustainable industry wide solution, in June 2003 Mortgage Choice and a number of other brokers and lenders commenced investigating the potential for industry wide adoption of Electronic Loan Processing by brokers and lenders.

A platform provider was selected in October 2003 and the participating broker groups commenced submitting electronic applications to the first lender during the second quarter of 2004 and will be extended to additional lenders throughout 2004 and 2005. The aim is to implement a structure through which all brokers and lenders may access the same platform on an equitable basis.

3.7

Industry trends and outlook

Mortgage Choice believes the outlook for the mortgage broking industry is for continuing growth through increased market share of the housing finance market.

The Company believes there are a number of factors which could contribute to increases in the market share of the broking sector over time of the housing finance market including:

convenience: the attractiveness and convenience of the mortgage broker service means that a new

generation of consumers may have less natural affinity to transact directly with a bank and may be more likely to use brokers;

regulation: increased regulation may increase the actual and perceived professionalism of brokers

amongst consumers, as well as increasing standards amongst active brokers in the field;

awareness: as more consumers have positive experiences with brokers, awareness of the channel and the

fundamental benefits of the broker service are likely to increase, leading to an increase in referred activity;

IT development: the development of electronic loan processing is likely to facilitate greater efficiency and

volumes for broker submissions; and

new lenders: in an increasingly competitive, deregulated mortgage market, new mortgage providers

without an existing branch structure are more likely to utilise brokers as their primary distribution channel. Mortgage Choice believes that consolidation of the mortgage broking industry may occur in the near-term. The industry remains highly fragmented with small players potentially more affected by the expected increased regulatory burden and IT requirements. In addition, lenders are encouraging smaller brokers to join larger groups based on their preference to increase back-office efficiency by dealing with a smaller number of brokers. This provides an opportunity for the larger established players in the broking industry.

4.1

Overview and history

Mortgage Choice is one of Australia’s largest mortgage brokers as measured by loan book size and origination levels. It was founded in 1992 by Peter Higgins and Rod Higgins. At the time Mortgage Choice was established, many banks would not consider using a third party to originate new mortgage business. Mortgage Choice is now an established, profitable business with 537 brokers originating 4.8% of all housing loans in Australia (six months to 31 December 2003) on behalf of a panel of 27 lenders, has a loan book over $15 billion and has an approximate 18% share of the mortgage broking market.

4.2

Strategy and competitive position

Mortgage Choice believes that the combination of the following fundamental components of its business model provides it with competitive advantages over other brokers in the marketplace:

high quality service: Mortgage Choice aims to provide a higher level of support to its Franchisees than

many of its competitors;

strength of lender relationships: Mortgage Choice generates significant loan volumes to lenders

and this places it in a strong position to shape key operational issues with lenders and drive initiatives such as electronic loan processing;

franchise business model: Mortgage Choice operates through a network of Franchisees. The symbiotic

relationship between the Franchisees and the Company is underpinned by the Franchisees being incentivised to grow their business whilst valuing the services provided by the Company;

brand: Mortgage Choice’s brand is recognised as a leading consumer brand and has been built upon

a proposition of being the advocate of the customer not the lender, supported by industry leadership on issues such as regulation;

economies of scale: Mortgage Choice’s loan book is now of such a size that trailing income now covers

all fixed costs, with origination revenue (net of commissions paid to Franchisees and marketing costs) flowing through to the bottom line; and

no product of its own: Unlike some of its competitors, Mortgage Choice does not distribute its own

products, acting only as an originator for banks and other financial institutions.

4.3

Products and services

Mortgage Choice assists customers in the selection of a mortgage from a complex range of products available via its lender panel by identifying the loan which is most suitable based on an individual’s particular needs. Customers are provided a choice across a broad range of over 200 home loan products offered by a panel of 27 lenders, representing each major category of lender:

Types of Lender Types of Loan

Major banks Standard variable rate

Regional banks Basic variable rate

Other banks Fixed rate

Mortgage managers Bridging

Credit unions Line of credit/revolving

Building societies Non-conforming

Non-conforming/Sub-prime Low-documentation

Other Honeymoon/Introductory

Mortgage Choice brokers are provided with the Company’s proprietary software system which allows a comparison of the customer’s loan requirements with the products offered by the lender panel. The system generates a list showing which lenders would approve the customer’s application and indicates the maximum borrowing amount for each of these lenders. Based on the list, the customer’s circumstances and preferences and the judgement of the broker, a shortlist of possible loans is presented to the customer for a decision as to the appropriate application to submit.

Completed loan application forms are submitted by the broker on the customer’s behalf, thereby saving the customer time and the associated administrative burden. These services are provided at no direct cost to the customer.

Mortgage Choice brokers also project manage the loan application process including answering customer queries and liaising with lenders to ensure that the customer’s timetable remains on track.

The Company has implemented a number of initiatives designed to protect the customer from unethical business practices and assist them in making a home loan choice. These include providing customers with the following:

Customer Charter: this fully discloses the service standards customers can expect from a Mortgage

Choice broker and outlines commissions received, how the commission is calculated, privacy issues and complaints procedures;

Consumer Checklist: this assists customers in selecting a reputable broker by outlining key areas

potential borrowers should look at including factors such as a potential bias due to different fees paid by lenders and/or received on products; and

Refinancing Checklist: this self-assessment tool assists borrowers to make an informed decision on the

question ‘does your current home loan still suit your present and future needs?’.

4.4

Lender panel

Mortgage Choice has expanded its lender panel from 22 lenders in 2001 to the current 27 lenders. The panel currently includes most of Australia’s leading lenders, providing a cross-section of products that Mortgage Choice considers to be a representative spread of available home loans:

Mortgage Choice Lender Panel

Lenders Products1 _Lenders