Home is where the loan is

By Desné Masie

Integer is a new player in the mortgage space dominated by the commercial banks and SA Home Loans.Its main feature is the way it combines transactional features with home loans.

CEO Simon Stockley says: "The product starts its life as a mortgage account. We are encouraging people with mortgages to switch to this product." If the bond is in your name, there are no registration fees and Integer's attorneys will negotiate a 50% discount on bond fees for you. There is an initiation fee of R2 950.

The Integer model enables a salary to be paid into a bond account. What does this mean and how does it work out?Savings can be significant over time. Most SA consumers are paying off a loan at the prime rate of 14,5%.

According to Integer, assuming a R500 000 bond payable over 20 years, and a monthly salary of R14 750, as much as R55 829 can be saved over 13 months.Homeowners can borrow up to 85% of the value of their homes. Integer has found people are borrowing about 70%. Like similar models, it can be seen as a line of revolving credit for your home.

Stockley is aware that the concept of a single banking account is not new. FNB offers the One Account, which allows consumers to consolidate their homes as a cheque account, overdraft, personal loan and home loan.

The difference, claims Stockley, is flexibility: "We have taken the general principles of a mortgage and tweaked them a bit. With the One Account, you have to put your whole salary into it. Here you can split your salary between your cheque accounts and Integer."

Some debts can come off Integer and others off a cheque account. This is because "people would rather have a small positive balance on their transactional accounts. It is quite scary to see a negative balance of R900 000 on your account."

One of Integer's features allows an additional credit loading of 1% of the value of a home onto a debit card, in addition to the maximum loan of 85%. This can be paid back at a lower rate than an overdraft, because payments would be made at the same rate as the Integer home loan.The concept has apparently worked in developed markets.

In SA it has been offered in the private banking space, but, says Stockley, "not really in the mass-banked sector. I suppose it is not offered for good reason. Banks make money from the inefficiencies of their products."

Is it a good time to launch yet another mortgage product, when the global housing market is becoming depressed?Absolute house prices have also come down in SA and made it a buyer's market.Says Stockley: "It's a good time for a new product. But we can't compete on product alone, so we will have to compete with our service and fees, especially on the rate we lend to customers.

Banks advertise the worst possible rate to consumers." Most people don't realise you can negotiate your lending rate down from prime.A lot of South Africans started to think about unlocking the equity in their homes during the property price hike by increasing the size of their mortgages.

How is an independent player like Integer funding this business? Unlike banks, Integer does not take deposits. Banks use retail deposits to fund their loans and mortgages.Stockley responds that "we are funded by securitisation in the capital market. This is a mechanism I pioneered at SA Home Loans. We are looking to securitise towards the end of this year, as we are still in the ramping-up stage and building up our loan portfolio."

Is this not a business risk, with the global market tightening as a result of the subprime meltdown? Stockley believes the SA capital market is still sound and interested in this product: "But there is still a risk that when we need to securitise, we might not be able to."He says Integer will have to look to alternative sources of funding should it not be in a position to securitise. "We could (potentially) access Investec's balance sheet on a short-term basis to ride out any disruptions to the capital markets," he says, and cites the example of Northern Rock. "If you look at the real casualties of the subprime, it is those specialist lenders without bank shareholders that have been worst hit."

Integer funds its loan portfolio through securitisation, but the venture capital for the loan portfolio has been provided by Investec and Purple Capital.Stockley says: "Since we launched in October, we have had applications in the sum of about R775m, but about 40% of the projected gross applications will be registered, which is about R300m."But this is a patient sort of business and definitely a long-term investment for Investec and Purple. It's going to take about three to five years for this business to become profitable."The actual mortgage switches can take anything from four to six months.

This means consumers also have to exercise patience before deriving benefit. For example, commercial banks will make clients wait for up to three months or pay three months' instalments, before they effect a switch.

Mark Barnes, CE of Purple Capital, is also chairman of Integer: "The reason we are also on the board is that our cost of capital is higher than other financial institutions, so we want to be involved. This is a good entrepreneurial venture with good professional skills. We expect a good return."

Financial Mail
Friday, February 08, 2008 10:16:00 AM