Home loan applications and your bank

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09 Nov 2012

For many years, the conventional wisdom for the consumer has been to “shop around” for the best deal.

Home loan applicants who do their transactional banking elsewhere, are more costly than own bank clients because they come with a higher risk (through being more difficult to assess accurately), which has in the past translated into higher default rates than in the case of own bank clients, as well as due to their lower take up rates of costly-to-process home loans grants.

And in principle one certainly can’t find too much fault with this philosophy.

Today, this approach is followed by many banks’ home loan applicants.

Ironically, though, the net result of multiple applications by home loan applicants to more than one bank may actually be a more costly home loan, for example, a higher interest rate, than would have been the case in a hypothetical “single submission” world.

This may sound strange to some but it is because a home loan is a very different product to some durable off the shelf consumer product.

Considering more than one bank could theoretically save a small margin on the interest rate.

However, there are limits to how 'cheap' banks can go on interest rates, as there are lower limits to the cost of funding the loan as well as a myriad of bank operating costs.

The competitive nature of the banks has by-and-large diluted the benefit that clients get out of the additional effort, with interest rates on home loans being arguably the most competitive of all the various types of loans available.

There are even a number of instances where shopping around may even be harmful to a potential customer.

Consider this, assessing a new home loan application is an 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.

While it has become more common practice for individuals to be multi-banked, in the sense that a home loan, for instance, may be at one bank and transactional banking at another bank, the reality is that this may well be more costly to the client as opposed to having all banking at one bank.

When considering more than one bank, therefore, a potential customer increases the overall cost of processing new applications, and that cost is distributed among customers who take up the loan with the respective bank.

The challenge for banks is how to find a way of reducing processing costs by increasing the ratio of loans taken up versus those that are not.

One of the potential ways of doing this is to focus on those applicants who bank with their own bank.

This may sound a little “discriminatory”, but own bank clients tend to be less costly clients in that they are more likely to take up their own bank’s home loan grant after it has incurred the processing costs.

FNB Home Loans’ experience is that, for the last six months, more than 30 percent of its home loan applications are submitted to multiple banks for approval.

However, on average less than 10 percent of other bank customers who apply at FNB end up taking an FNB home loan, compared to around 25 percent of FNB customers.

The bank finds this to be less costly in processing the client’s home loan application.

Your primary transactional bank can assess a home loan much more cheaply 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.

Additionally, 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.

Home loan applicants who do their transactional banking elsewhere, are more costly than own bank clients because they come with a higher risk (through being more difficult to assess accurately), which has in the past translated into higher default rates than in the case of own bank clients, as well as due to their lower take up rates of costly-to-process home loans grants.

Certain banks are now following a strategy of turning away non-banked customers, some even before the application is assessed.

These effects result in FNB customers being offered a significantly better home loan deal from FNB than competitor bank customers on average.

Certain banks are now following a strategy of turning away non-banked customers, some even before the application is assessed.

But under the current reality of high rates of “wastage”in the system, for which everyone pays, is there still a direct advantage for the home loan applicant to take up a loan with his own bank?

Since FNB’s own transactional clients are easier to assess, this proves to be a lower risk with lower default rates on average; the reality is that we can “price” them slightly lower than seemingly comparable non-bank clients who come with a slightly higher risk on average due to the difficulty in assessing their creditworthiness.

This ability to offer our own clients a lower risk-related interest rate probably goes some way to explaining why a higher percentage of our own clients end up taking up loans with us than is the case with other banks’ clients that are busy shopping around.

But the potential advantage of having one’s home loan at the same bank as one’s transactional banking goes further.

For example, using your FNB Home Loan in conjunction with an FNB Cheque account unlocks additional value.

A Flexibond option is available that allows you to transfer pre-paid funds from your home loan into your cheque account instantaneously and cheaply.

This option is subject to credit approval, but once activated allows this transactional capability through any one of our multiple channels, including the FNB App, Cellphone and Internet banking.

The client can utilise this ease of shifting of funds between accounts to reduce their interest bill on the home loan, by moving them into one’s home loan temporarily to prevent them from lying idly in a low interest current account, while being able to access them immediately when needed.

While monthly interest saved like this may often seem like small and trivial amounts, over 20 years the cumulative saving can become significant.

Having all of one’s banking at one bank along with one’s home loan can have further benefits.

Many of our home loan clients do apply for further credit subsequent to the home loan.

As mentioned, if they bank with us they may get a better interest rate on that new credit too.

But our ability to assess our own clients better may also mean that there is a better chance of granting the appropriate amount of overall credit to a client, thereby not allowing them to become over-indebted or run into financial pressure.

While it is ultimately up to the client to take responsibility for his own finances, a bank can assist if placed in a position to get its credit assessments of a client as appropriate as possible.

If all of the client’s banking activities are at one bank, this likelihood is greatly enhanced due to the bank possessing better information regarding the client, and of course where a client makes a point of being transparent regarding his financial affairs.

This may appeal to the client with the good intention of remaining financially healthy while admittedly some of the clients with more questionable intentions may not enjoy the prospect of one bank having so much information.

While it has become more common practice for individuals to be multi-banked, in the sense that a home loan, for instance, may be at one bank and transactional banking at another bank, the reality is that this may well be more costly to the client as opposed to having all banking at one bank.

In addition, they may make it more difficult for a bank to assess them financially and from a risk point of view, which may not only place the bank at greater risk but the client as well.

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