To be precise, I should say the lesson we draw from Uber versus Grab and how that too can happen to the mortgage industry.
By now most would have heard about the news of the merger – I would rather put it as Uber bowing out of S.E. Asia and ceding market share to Grab. There can be mixed views on this news I feel strongly this is anti-competitive and a negative development for commuters in Singapore. This is drawing from what I see in many industries in past decades that has gone through free market compeition from airlines, telcos, to serviced office rentals just to name a few. There are absurd views I read which argue that service would improve and as Grab dominates the entire market it is better able to match demand and supply leading to greater efficiency in deploying its fleets. First and foremost, understand that Grab is not a social enterprise, and when an entity has absolute pricing power with no viable alternative for the consumers, over time price can only go up but not down.
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The similar sitatuon could also happen in the home loans market, which is pre-dorminantly shared by the three local banks which collectively command an estimated 85% of the market. To draw an analogy, Grab is like local banks which have big presence in South Asia. Uber is like foreign banks with huge global franchise but are dwarfed by their local counterparts when it comes to consumer banking business in Singapore. Local banks naturally have an advantage when competing on their home turf with brand trust & familiarity, greater branch network and access to cheaper funding source like retail deposits. For the same three factors, foreign banks would find it an uphill task taking on the local competitors and some might feel the margin squeeze so much so as to sell out and exit the market totally. This has happened before on more than a few occasions.
Imagine should the day come when foreign banks one by one decide to bow out of the mortgage market from the likes of StanChart, HSBC, Citibank, Bank Of China, and even Maybank, what would happen when the time come for re-financing of your home loan? With only three local banks, you effectively have a choice of only two other lenders and very soon you will realize that the three banks tend to match one another in terms of price offering – it’s only a question of who go first. Is that not absolute pricing power to some extent?
We hope that day would never come as unlike taxi and transport fares, mortgage interest costs forms a huge proportion of our total expenditure. Take a typical loan of $800,000 over a 30-year tenure at the long-term average rate of 3% p.a., that translates into a total interest costs of $414,219 if the mortgage is serviced to the last year. We want to make sure there is always free market competition giving real choices to homeowners every time we do a review of mortgages which should happen once every three years.
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For this reason, we have always advocated the need to support foreign banks especially when there is some savings from refinancing home loan to another bank, no matter how small that savings could be. Some might call this “churning” behaviour in sales which is frowned upon, but for mortgages I beg to differ and in fact I would argue that it is good for borrowers and the mortgage industry in general. If a hardworking mortgage broker is able to source for and find another home loan package that, aftering factoring in all the interest savings and trnasactions costs involved, would result in a net benefit of only $200 for example, why should you not move? After all, with $200 savings you could easily pamper yourself with a nice rejuvenating massage after all those long hours in the office, plus more importantly, you are contributing your part in keeping the entire mortgage eco-system alive from ensuring there is free market competition, jobs for bankers (so they meet their targets), business for law firms, to the livelihood of mortgage brokers like us (who are paid referral fees only if the banks successfully acquire new customers). Unlike churning in traditional sales for example life insurance, no one loses out in mortgage churning. On the contrary, everyone is a winner as you get a net benefit of $200 just by submitting some forms and making one trip down to the law firm to sign the mortgage documents. You might also sign yourself onto a better set of mortgage contractual terms from lock-in reduction, flexibility to pay down, sale without penalty, etc. and whatever latest features launched by a bank more hungry for your business. The banker meets his monthly mortgage target and keeps his job while other bank jobs are being disrupted. The law firm continues to get refinancing business in the midst of any property market slowdown, hence avoiding retrenchment exercises. We, mortgage brokers, can earn our livelihood and keep all comparison sites up and running. Secretly, even the banks themselves who cry foul that mortgage brokers often churn and take away their customers for repricing are happy. Why? Simply because every management is measured on loans growth and new accounts brought in every year, on top of profitability. If every one stays put and no one is switching, will there be enough new property purchase loans to hit performance targets that justify a year-end bonus?
I have made the case. To avoid an “Uber-exit” in mortgage industry leading to a loss of free market pricing, we all have a part to play.
Finally, let me qualify here – I am a Singaporean and I am not xenocentric. My view in this article has nothing to do with patriotisim but is simply a vote for free market which can only be a good thing for consumers. At the end of the day, whoever offers the best pricing and the best home loan terms should win the deal be it a local or foreign bank. We support them both. We only advocate the need to support foreign banks as we know many in the market favours local bank to the detriment of foreign players. We need to treat them as equal and favour the one who offers the best overall value, hence a level-playing field.
Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.