Heartland launches online home loan offers with aggressive one to three year fixed rates and a floating rate as it tests appetite for digital mortgages

Heartland launches online home loan offers with aggressive one to three year fixed rates and a floating rate as it tests appetite for digital mortgages

By Gareth Vaughan

Heartland Bank is making a trial foray into the home loan market, offering market leading fixed-term and floating mortgage rates via an online service.

The bank's offering a 2.89% one-year rate, a 2.97% two-year rate, a 3.39% three-year rate, and a 3.95% floating rate. The best advertised, or carded, one and two year interest rates on offer from other banks is 3.15% for both terms from China Construction Bank, which also has the best three-year offer from another bank at 3.19%. The lowest floating rate from other banks is the 5.15% on offer from The Co-operative Bank, Kiwibank and ICBC. (See all banks' carded, or advertised, home loan interest rates here).

Heartland Bank CEO Chris Flood told interest.co.nz the home loan push is "very much a trial."

"We're out testing the appetite New Zealanders have to do their work online in terms of origination for a residential mortgage," Flood says.

Heartland already arranges unsecured business loans and car loans online, and Flood says complying with required lending standards is "a key part of our proposition." In 2017 Heartland dipped its toe into the home loan market through a previous online initiative, Open for Home Loans. However that offer only featured a floating mortgage rate and Flood says the market wasn't there for it.

"Most New Zealanders look for fixed rates so we didn't really pursue it. But I think the marketplace is different now," says Flood.

Heartland was formed through the merger of Marac Finance, CBS Canterbury and the Southern Cross Building Society in January 2011. It gained banking registration from the Reserve Bank in December 2012. Heartland has focused on niche markets such as reverse mortgages, car loans and livestock finance where bigger banks are not aggressively competing like they do in the home loan market. It also lends money for unsecured personal loans through licensed peer-to-peer lender Harmoney.

A corporate restructure in 2018 means Heartland Bank is now a wholly owned subsidiary of the share market listed Heartland Group Holdings. Flood indicated if the home loan trial becomes a long-term offering, Heartland could fund its mortgage book through wholesale funding at Heartland Group, as opposed to Heartland Bank, level. Not having to rely on retail deposit funding will better position Heartland to compete in the home loan market, Flood says.

It also means Heartland's home loan book could be held by the Heartland Group, and thus outside Reserve Bank regulation of Heartland Bank.

Flood says there are no specific timeframes or lending targets for the home loan trial. The idea is to offer digital convenience to customers, who can apply for home loans via their smartphones, at low cost to Heartland.

"We'll run it [the trial] for a period of time and then review it and see how it went, how the user experience was."

Then the ability to grow it would be dependent upon how Heartland would fund a much larger mortgage book.

"And that's most likely to be in the wholesale area rather than retail deposits," Flood says.

"The critical thing is to get enough experience and information to then pause and reflect on what we've done and how we've done it, what our next step is. So I don't have a number in mind or a term in mind, it's really based on what sort of feedback and support we get and what we're able to learn," says Flood.

"The critical thing is to get enough experience and information to then pause and reflect on what we've done and how we've done it, what our next step is.

"If this was to prove to be successful then we can leverage our corporate structure in a wholesale [funding] sense and we think there's an appetite in the market for this sort of asset. So it's something the group [rather than bank] would be able to fund more efficiently than the bank which still has a large share of retail deposits."

"The group has access to wholesale lines and if that's the most efficient way to fund it then that's absolutely what we'd do," Flood adds.

In terms of the very competitive interest rates on offer Flood says these are to make sure the service is successful.

As of December 31 Heartland held just $25.284 million of home loans. Flood says these are left over from CBS Canterbury and the Southern Cross Building Society, and have low loan-to-value ratios "that people are in the last throes of paying off." In contrast it holds $586.003 million of reverse mortgages.

Heartland has tight loan criteria with customers needing at least a 20% deposit or already owning a house and having at least 20% equity in it. They'll also need to be planning to live in the property they're borrowing against, which must be a standalone house. Thus investors and apartments are excluded from the offer.

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Here is the full snapshot of the advertised fixed-term rates on offer from the key retail banks.

Fixed, below 80% LVR Floating  1 yr  18 mth  2 yrs   3 yrs  4 yrs  5 yrs 
as at March 5, 2020 % % % % % % %
ANZ 5.19 3.45 3.49 3.65 3.99 4.75 4.85
ASB 5.20 3.39 3.75 3.55 3.89 4.19 4.29
5.30 3.49 3.39 3.55 3.89 4.09 4.19
Kiwibank 5.15 3.45   3.55 3.89 3.99 4.09
Westpac 5.34 3.39 4.25 3.55 3.99 4.35 4.45
Bank of China 5.75 5.25   5.35 5.50 5.70 5.99
Co-operative Bank 5.15 3.49 3.59 3.59 3.89 3.99 4.09
China Construction Bank 5.50 3.15   3.15 3.19 3.30 3.45
ICBC 5.15 3.18 3.18 3.18 3.20 3.99 3.99
Heartland Bank 3.95 2.89   2.97 3.39    
HSBC 5.24 3.54 3.54 3.20 3.69 3.79 3.89
HSBC 5.29 3.39 3.69 3.55 3.89 4.19 4.29
  5.29 3.39 3.55 3.55 3.89 4.45 4.55
Price Match Promise     3.39     4.09 4.19

In addition to the above table, BNZ has a unique fixed seven year rate of 5.70%.

Fixed mortgage rates

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Good to see a bank finally competing on the variable rate.
Still a lot lower to go yet.

2.89 looks super tempting. If investors were not excluded I’d move a couple million of borrowing to them. Cross securitisation makes it difficult to split the portfolio into smaller chunks.

If you throw your personal home in as collateral some banks accept that as a non-investor loan. May pay to check the terms with them.

I imagine you say "if investors were not excluded" because of Gareth's line "They'll also need to be planning to live in the property they're borrowing against, which must be a standalone house. Thus investors and apartments are excluded from the offer." I think Gareth's conclusion "thus investors are excluded" is not necessarily the case. You most likely can offer your home as collateral to finance an investment property. Email Heartland, you most likely can move your loans to them

Their online application tool caps applications at 1,000,000. Which I believe means they aren’t even really interested in business from buyers of above median Auckland property?

They always do very targeted offerings, and are taking over parts of the market systematically. I'm interested to see how this pans out.

I don’t understand why banks do specials for owner occupiers only, surely picking up an entire investment portfolio means less admin to acquire more business at once and as long as the security includes the main home then the risk is the same as if it were just the main home being lent against?

The Domino Effect of a property portfolio failing is far more expensive to a lender than just the solitary family home.

Vested interest in keeping the home is a major factor. Also someone that is just working and paying a mortgage that is less than rent is unlikely to default. If some owns 10 houses as rentals and suddenly most or all of them are empty then it's easy to end up with no cash to pay the 10 mortgages.

I don't understand why some residential property investors don't understand that residential property investment poses risks just like every other investment class.

Banks take positions according to risk and this is perfectly standard. However, being in denial about an investment class being the same risk level as an owner occupier is perfectly naive.

It's the weight that is attributed to the investor risk factor which is hard to understand.

E.g. Residential home owner buys $1m home with $200k deposit. LVR is 80% and assume DTI of 8x (home owner earns $100k pa).

Investor buys $1m home with $800k deposit. Also provides own $1m home as collateral. Income is $150k pa plus $50k rent ($200k). LVR is 10% and DTI is 1x.

In the real world the investor would negotiate a better rate that the window rate offered to the home owner (probably why they limit the window offer to home owners). However, it's bad business for the bank to not acknowledge this and just place higher borrowing conditions on investors to receive the same rate.

Westpac tried this on me as my rentals are held in a company, "corporate loans have a 0.5% uplift" they said. BS I said, try that shit and you guys are out of the running, they folded straight away and got my business. I still wonder how much business they lose because of this stupid position.

I am fine with assessing on risk and recognising investment risk is higher then home occupied where ALL OTHER THINGS ARE EQUAL. But blanket rules without looking at the actual numbers are stupid.

Probably because of Behavioural Economics because that proves that not all things are equal. There is a lot of research out there that actually proves that investors behave differently than home owners and several hypothesis as to why. Suffice to say, it's not just about the collateral.

Banks want to lend, if they don't, it's not for some arbitrary reason, that *is* the real world. It's either because of regulation, risk or capital issues.

Banks are obligated to hold more capital for residential investment lending than owner-occupier residential lending. That means it costs them more to lend for the investment category, thus affecting their pricing.

Isn't the risk weight % for mortgages also a function of the borrowers loan to equity ratio?

If so wouldn't an investor with an LVR of 10% require less capital than a home owner with a LVR of 80% (all other things being equal)?

That’s one factor, but so is class of security and OO is different to NOO. That said, I’d be surprised if a 10% loan got a worse rate than 80% oo with any proper bank

Separate pieces of the same overall policy. For residential investment lending, the Reserve Bank has dictated that a) more capital gets held those loans AND b) the LVR ratio. So when the Reserve Bank relaxed the LVR requirements slightly to allow no more than 5% of bank's lending to residential investment to be up to 65% LVR, the capital requirements remained the same - and are about to get stricter across all lending.

In your example, you're right in a way: a lower LVR means a lower Loss Given Default (LGD) in the capital calculation for any given loan. But residential investment lending is in a separate asset class to owner occupied home lending, when prior to the LVR restrictions coming in all home lending was in a single asset class. I can't recall the specifics in my time looking at capital adequacy, but the residential investment lending asset class does have a different overall calculation that means a higher capital requirement. So not equal.

My point was I doubt a bank is required to hold more capital in respect of a $1m loan to an investor with an LVR of 10% compared with a $1m loan to a home owner with an LVR of 80%. If that is correct then how could the bank use higher capital requirements as a justification for charging a higher rate to the investor?

I'm speaking in terms of capital ratios, and not LVR ratios nor actual amounts - we're not talking purely $100K vs $800K right? A higher capital requirement creates a higher cost to lend and that inevitably gets passed on to the borrower. Yes, 90% equity does create less of a risk and generally (but there's other factors, such as the customer's internal-to-bank credit rating, the type of product etc) less of a capital requirement for that given loan compared to the 20% equity one. But again, banks have to treat residential investment differently to residential owner-occupier.

The problem banks have is that there's no sophistication in their pricing to address all the factors within the capital calculation. I could be at 10% LVR but still be at constant risk of default due to constantly missing payments, which affects the capital calculation on that given loan for example. So the "blunt instrument" of a few basis points gets shovelled into that overall residential invesment category. I've seen banks try and solve for this first hand, but it gets incredibly complex. It's not risk-based pricing from the bank's perspective per se, although they do have that as part of the haggling toolkit below the line - as well as above the line rate specials for favourable LVRs.

You'll see this occur as the new capital rules get phased in over the next 5 years. I fully expect lending rates to be higher relative to the OCR after all that's done.

From memory this is not the first time Heartland Bank have looked to avoid Reserve Bank oversight. Shouldn't this be a worry?


less than half what they charge for their reverse mortgages but they are more generous with TD rates than their bigger competitors so maybe they have a bin full of money looking for a safe return in owner-occupied mortgages.

WOW 2.89% for 1 year, a full 0.5% lower than the main banks is very tempting.

Gareth, I don't believe that having "to live in the property they're borrowing against", excludes investors. You most likely can offer the house you live in, as collateral to Heartland and use the money borrowed to buy or refinance an investment property. That's commonly done, I do it

Good rates.

When doing last loan via Kiwibank, the entire thing was done online, with no bank staff input. The by far slowest part was at the end, getting it 'approved' by a person. Of course, this process didn't involve haggling over rates etc.

So, I have an appetite for 'digital' loan processes..

I would like to welcome Heartland bank to this market segment. The market needs competition and with rates falling and other banks clinging onto margins this is a great opportunity to build a substantial loan book that can then be leveraged out to other products. Best of luck!

2.89% is comical. in my opinion, they just want to gauge who wants to give them some data on ex loans. try their loan application online, you will see what i mean.

Current RBNZ probability rate cut for March meeting, Heartland need to throw in a Fijian holiday .

All of those deals come with penalties if you refinance in less than 3-4 years. You're better off just negotiating the lowest rate and buying your own holiday.

I just started filling out their application form, and got rejected as not meeting their criteria before even getting to what my income is. My owner-occupied property is life-style block owned by my family trust, immediately adjacent to a northern city. Application to refinance of about $400k. Equity in the property around 70% (ie loads of security). I already use my call account with them for surplus funds.
So the rejection is not income, is not level of security.
Don't know what profile of borrower they are targeting.
Maybe they don't want borrowers aged over 50? Or lifestyle blocks? Curious.

It might be your location. I rung them up and was told that they weren't lending for houses in Palmerston North, but only for houses in about half a dozen cities. (Auckland, Wellington, Hamilton and a few others).

Thanks for sharing an actual experience, I wish this comments section was used more often in this way

Have a look at their conditions. You were likely rejected as the house is owned by a trust. https://www.heartland.co.nz/home-loans

Applications for mortgage refinancing jumped 26% in the USA as rates fell.
Could happen here.