Chris Laming, Client Director, NZAB

A new “Great Rate”

This week, Heartland Bank rocked the market with a new Headline residential mortgage rate of 1.99% for 1 year. This is the first time we have seen a mortgage rate at sub 2%. The market has been clearly signaling a coming drop in the OCR, leading to lower wholesale interest rates to banks. Rates dipping below 2% won’t come as a surprise. Although most of the market were picking that we wouldn’t see it there until early next year.

The interesting part is the criteria attached to Heartland’s offering to qualify for this market leading rate. I think it signals exactly where the banking market wants to go in the coming the years. The deal is simple:

• Apply and approval online
• Minimum of 20% deposit
• Living in the property
• Wage earner
• House located in a major centre
• Standalone, single house
• Owned personally or joint personally (no trusts or companies)

The deal is simple, fits into a straightforward box, and means the deal origination and approval process can be easily automated.

Why can this bank offer this low rate?

Ultimately its due a lower cost of the delivery of lending.

The origination and approval process is completed online, and therefore a banker is not required to assess the deal. There is no branch required to house the staff and the customer. There are no additional securities like personal guarantees, and there are no trustees to deal with. The house is located in a main centre which presumably means it’s easier to liquidate if need-be.

Furthermore the lower RBNZ capital requirements already motivate banks towards home lending.

Very simple. Very fast. Very cheap.

The process looks great to the bank’s leaders too, and you can just imagine the conversation “So we can originate deals faster, cheaper, from anywhere, and we can use a smaller labour pool to do it?” It’s a no brainer.

Sounds Great! Surely this must now start having a positive impact on other loans made by the bank?

Wrong!

This is going to drive some unintended consequences

This process is driven by the bank’s desire to increase market share in housing, with cost at a minimum, and deliver that strategy through a market leading rate.

This is the start. Simple and easy to manage customers is what they want, and the concept will be adopted by all the major banks.

So what if you live in regional New Zealand?

So what happens if the customer has received legal advice to put the family home in a trust? What happens if the customer is a self employed plumber? What happens if the customer’s situation is slightly more complex than the above?

If you’re outside of the box, you’ll have to pay for that.

Implications for the Agri Debt Market

NZAB focuses on Agri debt and the best way to obtain and manage it on the best possible terms and interest rate, to suit the customer-led strategy. Agri debt is what we live and breathe, so our major concern is the implications on the Agri debt market.

The Agri debt market is trending the same way as the housing market above. Banks want simpler businesses that fit into boxes. This means lending decisions can be automated and costs less to deliver, and ultimately, if it doesn’t fit, it doesn’t fit. The theory is bankers will be able to service larger numbers of customers. Bringing down the cost of lending.

The problem is, I cannot remember the last time I came across a “Vanilla” farming business. Every single farming business is unique, with its own strengths and its own weaknesses.

And furthermore, businesses are only getting more and more complex

So the very real implication is this:

If you don’t present your business or your request in a way that the bank understands, its going to be more expensive (at best) or declined (at worst).

Alignment of what a bank is looking for in a credit submission is critical here, and the ultimately the onus will fall on the farmer to make sure the bank understands the transaction or request.  

And guess what; asking for credit is not a process you get a second chance on if you get it wrong. There are real people that sit in credit, they form opinion on what they see first and changing that a second time around can be difficult.

Too often we see that process happen badly.

In previous articles from NZAB (Click here for further insights), we have talked about credit requests being not just about a budget and some financials.  Its much wider than that and is evolving continually from the banks as they assess the risk of your business in line with changing perceptions.  

One such example amongst many factors, is the accurate assessment of ESG (environmental, social, governance) considerations in each business.  

Don’t leave this process to chance, you’ve got too much riding on it.

It might mean the difference between acquiring that next farm or not, facing principal repayments that you might struggle to meet, or an increase in interest rate when it should be going down.

Get it right and you'll get your money, get great terms and see your interest rate at near home loan rate levels.

Talk to one of our experts today to find out more.