BNZ not so unbeatable, try a mortgage broker

The BNZ, by choosing not to deal with mortgage brokers, has removed itself from one-third of their potential market. Home-owners have embraced the mortgage broking industry in New Zealand and Australia as providing impartial advice on their home financing options. People recognise the value of this advice and perhaps realise that banks have a vested interest in selling a product that may not best fit their needs. Mike Pero Mortgages, for instance, deals with around 16 different lending organisations. There is no way the average person can afford the time, or even has the expertise, to approach every one and compare the terms and conditions for each.

The mortgage broking industry has grown in leaps and bounds over the past 15 years and now nearly one-third of loans in New Zealand are arranged through a mortgage broker and still growing. In Australia that figure is much higher, close to 45% percent.

So why is the BNZ going it alone on mortgages when its parent, National Australia Bank, and almost every other bank in Australia and New Zealand are more than happy to accept quality, pre-qualified mortgage customers from mortgage brokers?

The BNZ claims that by not using mortgage brokers the savings they make on commission payments allow them to cut interest rates. While this logic may hold for one or two loans it hardly seems credible for the many hundreds of loans the bank processes each month. It assumes that the BNZ can process these loan applications that were previously managed by mortgage brokers, for no additional cost. The only explanation for this could be if BNZ already had excess capacity among its staff otherwise it will have additional costs to process these loans.

There is another interesting aspect to the BNZ’s stance as they claim that not only have they made a saving on commission, they have also reduced the interest rate on their new loans and this has not cost them anything. This seems hard to believe and simple logic would suggest that if for example they have reduced the margin on their new loans by one quarter they will have to write a third more loans just to break-even! Further this only deals with the reduced margin on new loans because they will, over time, refix downwards the margin on their existing loan portfolio, if they offer existing customers this rate.

So how does their strategy work? They claim that by only working with two-thirds of the market, adding internal processing costs and cutting their lending margin that they are better off. The only explanation must be that they are making money elsewhere such as through increased fee income.

Let’s have a look at the BNZ’s offering. They offer a very competitive head-line interest rate but that is about it, there are no other benefits, the borrower will be subject a range of account fees and an application fee is payable.

So what can a mortgage broker provide? An even playing field and on-going transparency. A broker will often be able to match or even better the rate subject to loan size and other borrowing criteria and there will seldom be an application fee payable. Depending on the lender there may be low or no-fee banking and there will often be contributions to transaction costs. All of these benefits will more than offset any small saving in headline rate and in addition the client will receive superior impartial advice from a specialised and professional mortgage broker.

To put this in perspective the dollar difference on a 0.1 percent reduction in the interest rate on a mortgage of $150,000 is $12.50 a month. By comparison having fee-free banking could more than make up for this by saving $20 or more per month.

So why is the BNZ spending millions of dollars on attracting new customers rather than concentrating on retaining the ones it has? Consider that a half-percentage point cut on the BNZ’s $2 billion of new loans over a year equals a reduction in revenue of around $10 million. While the money “saved” by the BNZ in broker commissions is less than one-quarter of that amount, and would be paid anyway to cover its internal processing costs. So something does not add up here, maybe we will never know but it is unlikely to be a profitable strategy for their shareholders.

Surely taking impartial advice from a mortgage broker is the best step that anyone seeking a home-loan can take?