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Could Big Four lose their stronghold?

31 Aug 2005

Finance Week - Joan Muller

Banks to face a myriad players on their mortgage lending turf.

SOUTH Africa's Big Four commercial banks " which together hold at least 90% of the massive R400bn home loan industry " could soon see their market share and margins come under pressure as more players enter the SA mortgage lending industry.

Some expect as many as 30 new mortgage lenders " among them a number of international brands " to open shop in SA over the next three to four years. That will change SA's mortgage landscape dramatically, offering SA homeowners and investors more choice and flexibility than ever before.

International banking group Standard Chartered has already entered the fray, while SA financial services and benefit consultants, such as Alexander Forbes and Glenrand MIB, have recently brought alternative housing products to the market.

Alexander Forbes and Glenrand MIB are partnering retirement fund trustees and employers to offer salaried staff pension-backed housing loans as an alternative source of finance to that traditionally offered by banks.

Then there's talk of Richard Branson's Virgin group, through a tie-up with Absa, also planning to enter the SA mortgage arena. Refinancing " when existing mortgages are switched from one lender to another "is also expected to become a major trend in SA over the next few years.

Health and life assurance group Discovery recently introduced refinancing with cash-back incentive in an effort to persuade members to switch their existing mortgages from other banks to RMB stablemate First National Bank (FNB). SA assurers Sanlam and Old Mutual have also jumped on to the refinancing wagon through Absa and Nedbank respectively.

Ian Wason, MD of Cape-based mortgage brokers Bond Busters, says that refinancing or switching is a huge growth sector in SA. Bond Busters entered the market last year to focus exclusively on helping homeowners to refinance their existing mortgages.

Wason says that unlike the case in SA, it's common practise in Britain and the United States for homeowners to regularly shop around for the best interest rates and to refinance their mortgages every two to three years.

That's meant that the mortgage lending industry is far more competitive internationally than in SA. Says Wason: 'While SA's market is dominated by only four major players which have a limited offering in terms of choice, Britain has at least 200 mortgage lenders offering consumers 3 000 different home loan products."

Wason believe that SA will soon follow the international route. 'SA in on the brink of a revolution in terms of lending practices and home loan product offerings. We expect that the Big Four will in three or four years' time have to compete with at least 30 to 40 other lending institutions."

Wason says that the SA home loan market is attractive to international mortgage lenders as margins are much bigger than those in most other countries. He says that SA banks' profits are on average three times higher on their home loan books than that of British lenders.

However, Jan le Roux, chairman of mortgage originators PABetterbond, says that as new players increasingly enter the SA market " particularly those focusing on refinancing " banks' margins will come under pressure.

Le Roux says that through SA consumers haven't yet taken to refinancing, once they do banks, will have to fight to retain existing business. And the best way to do that will probably be to offer lower rates and therefore reduce margins.

Meanwhile, small but aggressive player Sa Home Loans continues to drive mortgage product innovation through its recently launched 20-year fixed rate option. SA Home Loans took the market by surprise last month when it announced that from August this year it would give clients the opportunity to fix their mortgage rates at around 12% for 20 years. Until now, banks offered fixed rates for a maximum of two years. Though the banks have yet to respond with similar long-term fixed rate options, the general expectation is that they may soon follow suit.

Sa Home Loans MD Kevin Penwarden says that banks have until now not been innovative in bringing new products to the market. But as SA consumers are increasingly exposed to more choice and flexibility, the banks will have no choice but to become more innovative in terms of their product range and pricing.

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