As promised in this blog some time ago, we like to offer our take on how foreign lenders can compete for a slice of the still-very-lucrative (to us) mortgage business in Singapore.
We do not know fully comprehend why mortgage business has lost its lustre for some foreign banks (and we think that is a big mistake) in recent years, with some quietly bowing out but only to return a few months later, or others taking a more lukewarm stance with packages which are priced out of market. With fewer banks competing for the mortgage dollar, it just means less option for homeowners. Overall we do see this as a negative for the mortgage industry and for Singapore homeowners and property investors alike. Without competition incumbents will sit easy on fat margins. Just look at how the budget airlines have shaken up the travel industry in the last 10 years of its existence leading to reduction in fares! Or how the new 4th telco entrant in Singapore that has already caused data plan prices to drop before it even started its opertions.
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And why do we say it’s a mistake to ignore mortgage business? While it may seem hard to do business in the face of rising cost of funds and inability to compete with local banks on rates especially with the introduction of DMR loans in recent years, let us not forget borrowers will not want to default on the mortgage that forms the “roof over their heads”. Yes margins might be squeezed a little bit, but if a bank is able to bring down all those inefficiencies or “waste” in the system (and trust me there is a lot of that), it can translate into higher profits with very little default risk, unlike lending to corporates or SMEs in the midst of a slowing economy in Singapore. And in a property-crazy country like Singapore a bank that wants to do well in wealth management will need to look at providing leverage to its growing middle-class base, and why let this steady stream of interest income go to another bank? A smart foreign bank could capture both interest and fee income from the same clientele base and maximize returns on each customer, by offering a lean and mean mortgage business operations.
It is not rocket science to know that to make profit in business, one either competes on margin or on volume. It is no different for mortgage business. If foreign banks accept the fact that they can never win on margin due to the inherent disadvantage in terms of funding costs where they will always end up paying more to acquire funds before they could lend out, then there is only one way left – compete on volume. And what we mean here is go all out for market share on razor-thin margins through product innovation, technology, and clever use of distribution channel. Surprisingly it might bring more profits.
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(A) Product Innovation
I have always wondered why is it you can have 15-year or 30-year fixed rate mortgages in US market but not here in Singapore? Maybe more can be done with product innovations from foreign banks which are rightfully better equipped to import their best practices from around the globe and in markets where they dominate. We are not seeing enough product innovation here be it some kind of combo loan between fixed and floating rate, or special features like interest-servicing only or fully flexible interest offset (only a few banks offer that now and some with higher interest rate which really should not be, with TDSR interest offset becomes even more meaningful). A lender with the most creative and value-adding mortgage features will surely attract demand for its loans. And by and large that has to do with how well the product team in the bank reads the changing needs of market – a gap we often see in most banks today where not enough ground level feedback and insights are sought from the frontliners. Very often the tool used to drive sales is simply the tweaking of commissions for sales people and the setting of higher sales targets, ie. both stick and carrot.
Closing this gap is one area where we, being frontliners and champions of customer’s long term interest, can help to bridge. Incidentally we have already hinted on how foreign banks might have an advantage offering longer tenure fixed rates as they are better able to go lock down back-to-back longer term tranche from interbank market (based on our understanding).
Technology is game changer in most businesses today, especially for those that are competing on volume where efficiencies in operation is paramount. Fintech is all the rage these days and banks that can successfully integrate smart technologies into every stage of their process flow from application, risk assessment, credit scoring, contract to delivery platforms stand to gain much. All these efforts will help to drive down costs thereby allowing for scale and profitability in operations.
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(C) Distribution Channel
Technology and innovation are the banks’ turf. However the third area is one where we are most apt to play a key role in. As much as technology could disrupt or change the way mortgages are sold, for example the proliferation of comparison sites here and all over the world, technology still cannot displace professional advisory provided by humans. This is especially true for financial products and those decisions involving big tickets or which affects mid to long term.
For this reason, foreign banks are unable to compete on volume as it requires substantial investment in branches or a sizeable mortgage sales force. Such costs are harder to justify unlike technologies which could bring benefit to the whole bank. This is about to change. As the mortgage brokerage industry evolves from here and the top broking companies start to focus on training and equipping its people to sell the myriad of mortgage solutions from the various banks, matching correctly the right product to the right customer, it provides the best avenue for foreign lenders to “scale up” on volume without the associated investment in human resource. Instead what they need to do is to simply hire “processors” who do all the paperwork and contracting for the bank. As sales pitch and soliciting of customers are performed by external mortgage distributors, these processors need not be remunerated on commissions. I see this as a likely outcome as foreign banks finally levels the playing field to compete on rates and volume.
By cleverly shifting cost structure from overheads to distributor fee model for external mortgage distributors, foreign lenders can finally scale up and become more profitable and get a bigger chunk of this lucrative mortgage market in a country that is well known for its property fervor. And to grab more market share they will introduce more innovative features for mortgages which will surely benefit the end consumer.
At MortgageWise.sg, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into market developments & helping clients track interest rate movements. Make a difference to the way you plan your mortgage today by consulting with a professional whose insights, experience and independent advice you could benenfit from, instead of going directly to the banks for their “standalone” views. We strive to become your first-choice mortgage partner and the creditable distributor of mortgage products for lenders in Singapore.