Over the last ten years mortgage originators such as ooba and BetterBond have played a significant role in increasing the competitiveness of home loans. By assisting customers to shop around for the best rates bond originators forced the banks into a price war which saw mortgage rates fall during the 2000s.

In the heady days of the last decade before the credit crisis, banks were heavily discounting mortgage rates to increase their market share of home loans with rates as low as 2% below prime.  Home loans were seen as an acquisition strategy, the bank would not necessarily make much profit but they could cross-sell other products such as chequing accounts and personal loans.

Since 2008 the cost of credit has increased three-fold due to the financial crisis. In other words depositors, pension funds and corporates with money to invest are demanding far higher interest rates to compensate for increased global risks, which in turn are squeezing the lending market. Although the prime lending rate is linked to the Reserve Bank’s repo rate, it is actually the cost of funding from institutional deposits that determines how much of a discount to the prime rate the bank will offer the customer.

The majority of the banks’ home loan book was done at prime less 150 basis points which is hurting the banking industry right now and it is no secret that most banks are making a loss on their home loan book. Although new home loans have far less aggressive pricing and a prime home loan rate is exactly that – only for prime clients, the cost of borrowing continues to squeeze the banks’ margins.

Banks are therefore looking at ways to cut down on the costs of home loans and cutting out multiple home loan applications through mortgage origination is one way to do this.Ewald Kellerman, Head of Sales at FNB Home Loans says that for every ten applications the bank receives from a bond origination company only one application (10%) converts to an actual FNB home loan. In comparison for every ten FNB customer applications three (30%) result in a home loan being issued. In focusing only on its own client base FNB hopes to reduce the cost of home loan origination and transfer those cost savings to its client base.

”Assessing a new home loan application is a very expensive process. Banks have to employ skilled labour and use sophisticated systems to assess the risk of the applicants and property before being able to make a decision. This operational cost needs to be incurred whether the application is finally taken up or not, resulting in a high level of wastage. All of these processing costs, both on loans taken up and those not taken up, must ultimately be paid for by home loan clients when taking up a loan, through the combination of an initiation fee as well as through the interest repaid on the loan amount to recover the remaining cost of banking the deal indirectly,” says Kellerman who adds that it is less costly to process an FNB client’s home loan application.

“Your primary transactional bank can assess a home loan much cheaper than other banks. Obtaining bank statements from another institution and verification of income, limited view/history of a customer’s banking profile and the additional cost of fraud raises the risk, and eventually the cost for non-FNB clients’ home loan applications,” says Kellerman who explains that it is often risker to offer a loan to another bank’s client as other banks are also in the position of being able to assess their own clients’ applications better, so when they turn their own clients’ applications down, and those applicants go elsewhere for a home loan, this implies a negative selection of competitor banks’ customers received as new applications.

Apart from cost savings Kellerman says the reduction in the number of applications the bank processes will also improve the service delivery to FNB customers in terms of turnaround and as the risk of lending is lower the bank will be in a better position to offer 100% bonds to its customers.

FNB’s decision to only grant home loans to its own customer base is a three month trial period until February at which time FNB will assess the impact on their client base. 

This article first appeared in City Press