Honeymoon offers and 1.99%; why it's important to look beyond the headline

Housing Market Written by John Bolton, Oct 26 2020

Heartland Bank came out with a staggering mortgage rate of 1.99% fixed for 1-year. Naturally everyone got excited, but what is it actually? Since then, no other banks have followed.

If you’re familiar with us, you’ll know that at Squirrel we don’t like to pull punches so here goes.

The devil is in the detail and it reminds me of the saying, you can put lipstick on a pig but it’s still a pig. Heartland is a great little bank, but this offer and the houpla around it is disingenuous. This isn’t the first time Heartland has grabbed a media headline with mortgage rates. Heartland itself, says on its website, “we’re back” and the obvious question is, where did you go?

Let’s start with this simple and revealing question: is Heartland a genuine home loan lender?

According to Heartland’s last disclosure statement it has roughly $40m of residential mortgages (ignoring reverse mortgages to retirees.) To put that in perspective, there is $288 billion of mortgage lending in New Zealand giving Heartland 0.01% market share.

That is one hundredth of one percent.

I would struggle to find any genuine home lender with lower market share. Nelson Building Society has $600m in residential mortgages, fifteen times more than Heartland bank. SBS Bank (which is a small home lending bank) has $3.4 billion of mortgages or 85 times more residential lending than Heartland Bank.

If Heartland were a fish in the residential mortgage ocean, I’d struggle to call it a minnow, it’s more like plankton.

So, if Heartland isn’t a significant residential mortgage lender, which it isn’t, then how do we make sense of the 1.99% rate beyond headline grabbing? I can't.  Think of it like a honeymoon – short-lived. 

So why is it not as good as it sounds?

It doesn’t come with cash backs, so what you see is what you get. 

As a comparison the major banks are offering around 2.45% BUT they are also giving up to 0.60% cash-back for new business.

Including a 0.60% cash back gives an effective one-year rate of 1.85%. That is already better than the Heartland offer and that is from every major bank doing new residential lending. So the Heartland rate in isolation of any other offer, is actually quite average.

Not only that, but the criteria for receiving the rate is so specific, most people won't be eligible.

What sort of credit policy does a $40m residential mortgage lender have?

First up you have to have 20% deposit. You have to live in the property, and you have to pay your income into a Heartland bank account. So forget it if you are a first home buyer or property investor.

But that doesn’t seem completely unreasonable for a small lender.

Next, it must be for a standalone house. So no apartments or terraced townhouses. Goodbye to just about anything that is getting built in Auckland right now.

It must be located in a major centre.  Goodbye the heartland.

It must be owned in your personal name and not a Trust or a Company. Goodbye rich people.

And importantly, it’s a limited-time and limited-volume offer.

Some of you have been here before explaining how your relationship fell apart: "we had a great honeymoon, but they changed when we moved in together."

What happens to Heartland’s mortgage rates when they don’t want more growth (or can’t grow because they don’t have the capital?). With your bank relationship you need to look beyond the lipstick.

Here’s my final critique

Heartland bank is a small publicly listed bank with a BBB rating. It has limited capital and capital for banks is very expensive and getting more expensive. To date, Heartland has had a strategy of deploying its limited capital to high margin businesses like lending to SMEs, consumer lending and reverse mortgages. That has been a smart strategy that has given it better returns on equity than many of its comparison banks that are community-owned cooperative banks. If you are an investor, it has been a very good investment.

Residential mortgages is a low-margin business especially at sub-scale and ignoring ‘upfront costs.’ I’d bet that Heartland will disappear again and be back some time next year with another headline from the marketing department, “we’re back again.”

Heartland, you were never here!

On a positive note...

Mortgage rates will likely drop next year and will eventually be down around the 2.00% level, it’s just not happening yet. If you were holding off fixing in anticipation, my advice would be to get in and fix now for a year around 2.45%. Floating rates are expensive and it’s not worth the wait.

If you are contemplating refinancing and liking the idea of a honeymoon, then there are better deals in the market. Do an online application and we can talk you through the options.

We can help. Have a chat to one of our advisers.