About 60% to 70% of the South African home finance market is now facilitated by originators, who have managed to secure interest rate concessions of 1% to 2,5% for their clients. They handle the shopping around for you, as well as the administration and insurance.
That’s a far cry from the days when it was pointless to shop around because banks were not interested in offering anything other than prime less 0,5% at best.
Bond originators have changed the industry forever. But there is talk of the service degenerating to little more than processors, as newcomers compete on price for business.
Low barriers to entry have resulted in a proliferation of these service providers, as well as “aggregators” (smaller players who establish themselves with more established entities), and who collectively account for about 30% of all origination business.
However, just as South Africa’s banking industry is dominated by the Big Four, so it is with the origination industry. The major players are MSA, PA Betterbond, Bond Choice and LoanLink (through its franchised Quantro, Wizard and Fines brands) — all of which are formally allied to lenders and estate agents.
Prior to the advent of originators, the mortgage sector functioned through relationships built between banks and estate agents, with commission of about 1,2% for their business. Agents have increased that percentage to about 1,5% by aligning themselves with originators.
The advantage for banks is the reduced workforce to process applications, while home owners “have greater access to different brands”, says Deon Lessing, marketing director of Betterbond. “The client can decline to use a specific originator, but there is no reason why he should because the entire basis of this industry is the strength of the relationships between estate agent, originator and bank.
“They can go elsewhere, but then the relationship won’t be as strong. And the cost to the client in either case is the same — it’s free. I think bond originators have a strong place in the market because they offer clients independent advice. There’s a lot to buying a house and we relieve them of at least one of the hassles — finding the best deal.”
The rate that banks offer on home loans varies according to the circumstances of the individual. The individual is unlikely to know these variances, but the originators do.
“The likelihood is that we’ll get him the best deal, though the actual rate varies according to market cycles as well as the individual’s circumstances. One week we get prime minus 1,5% and in another week prime minus 2% — for similar clients. The banks don’t want to give prime minus 2%, but because we do thousands of home loans and have a comprehensive database, we can negotiate it,” says Lessing.
The process of negotiating the best rate is not always transparent, and Melanie David, an attorney and director of Powerhouse Financial Services, suggests home buyers should ask to see the quotes their originator has acquired on their behalf.
Insurance has become another “value add” offered by originators, but Lessing suggests these arrangements may also not be transparent, and recommends that in almost all cases the client takes the insurance on offer from the lender. “It’s based on relationships. It’s convenient in that they’ll simply debit your bond account, and they’ll track the value of your house against inflation,” he says.
Bonding with banks
Bond originators are paid in opaque ways that appear not to cost the end user anything. The reality is that their costs do add to the overall house-purchasing experience, and the consumer ought to be aware of what the cost is,.
Ian Watson, MD of origination company Bond Busters, says bond origination in the United Kingdom costs the lender 0,35%, whereas in South Africa the comparable cost is 1,8%. It is, however, not comparable, because in the UK bond originators also charge the client a flat fee of £250.
“In the UK it is very much a service that people are prepared to pay for, whereas in South Africa it is one that they are not yet prepared to pay for,” says Watson. “In terms of what the originator is getting, it is the same in the UK as in South Africa, the cost is just spread differently. The cost is the same and I’d say it’s a fair price. It’s an inexpensive method for the banks.”
However, this has served to keep foreign originators out of this market — because our model is different, less transparent and appears to be more expensive.
“Only the Big Four banks — Absa, Standard Bank, FNB and Nedbank — can afford to pay the full cost to originators, which can be as much as 2,5%. The originators have to pay a percentage to the estate agents and also have fairly heavy fixed costs, so they will not deal with any lender that does not pay full commission.
“This has the effect of stifling competition, because new lenders cannot get access to the top originators,” says Watson.
The Bond Busters model differs from most others in that it does not have the often incestuous relationships with estate agents or property developers, but markets itself directly on the web.
“More than 70% of our business is debt consolidation and remortgaging. This is an enormous business in the UK, but in South Africa debt consolidation is a very new concept and is still viewed negatively by many credit managers. In the UK people access their mortgage bond every two years against their affordability, and even in South Africa most people want to get more money when they consolidate,” he says.