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New banks on the block

Disruptors have changed the taxi, takeaway food and accommodation industries – and now fintechs are looking to take over the banking and home loan markets. Kylie Dulhunty takes a look at just what some of the newcomers are offering.

Neobanks, smartbanks, non-bank lenders and home loan disruptors are all terms that prove the mortgage landscape in Australia is rapidly changing.

The days of traditional banks being the only option for buyers wanting to take out a home loan are gone, with an array of challengers entering the market.

These home loan disruptors include neobanks such as 86 400 and Xinja, along with non-bank lenders like Athena Home Loans.

The fintech disruptors are entirely digital, which means they don’t have bricks and mortar offices.

They promise customers a better deal than traditional banks, including better rates, fewer fees, greater savings and being up to six times faster in approving home loans.

Self-described smartbank 86 400 launched in September last year and started offering its Own Home Loan and Own Home Loan (fixed) in November.

Lending Product Lead for 86 400, Melissa Christy, says the Australian market had been crying out for different home loan options, especially ones that use technology to speed up the often drawn-out process traditional banks offered.

“We’ve launched what we call the first digital home loan for brokers,” she says.

“In a traditional home loan process with a broker, you give them your payslip, you give them your statements and your lease agreements, along with everything else they need.

“You give all your identification documents to the broker, and they complete the application and send all of that off.

“Then in the background, when the lender receives all of this, they then review the paperwork and that’s what takes the time to get an approval.

“They’re verifying everything you’ve said in your application against the paperwork you’ve submitted.”

Melissa says where 86 400 is different is they collect all the information required for a home loan application electronically and upfront.

Using their data capture partner MOGOplus, 86 400 has home buyers login and enter their bank account details to have their statements electronically collected before algorithms pinpoint their income and categorise their expenses.

“It makes it easier for us to assess because we’ve got verified data upfront,” Melissa says.

“The broker still has to complete the application, but from the customer’s point of view, they need to do an identification process on their mobile phone and an electronic collection of these statements that are on their mobile phone.

“But that only takes about two to three minutes.”

At the time of writing, 86 400’s variable interest rate for owneroccupiers paying principal and interest was 2.74 per cent, while the fixed-rate was 2.59 per cent for three years.

It had passed on the Reserve Bank of Australia’s emergency cash rate cut of 25 basis points, in full, in response to the coronavirus pandemic.

For investors paying principal and interest, the variable rate was 3.09 per cent or 2.84 per cent fixed for three years.

The smartbank’s loans also offer redraw facilities and offset options, with customer’s having the ability to have nine accounts attached to the loan.

“They can have up to three Save accounts plus a Pay account,” Melissa says.

“So if one applicant had four accounts and the other applicant had their four accounts, and then they had one joint account, they could have up to nine offset accounts.”

They also offer loan terms of up to 35 years and cater for PAYG customers and those with a loan to value ratio of 80 per cent or less but who must have 20 per cent deposit or equity in the property.

“In the future, we hope to expand that and cater for people with less deposit or self-employed customers,” Melissa says.

Melissa says 86 400 hit the market last year after identifying a need for a bank designed specifically for your phone.

It takes two minutes to sign up and with digital wallets, such as Apple Pay and Google Pay, you can start spending immediately.

“People are looking for new and more convenient ways to bank,” Melissa says.

“Today, more than nine million people already used their smartphone to do their banking.”

The 86 400 app allows you to see all of your accounts simultaneously, even if they are with another provider, and can predict when bills are due and provide reminders.

In February last year, ex-NAB executives Nathan Walsh and Michael Starkey launched Athena Home Loans in a bid to reinvent the home loan model in Australia.

“Athena is an innovative digital home loan platform that delivers great savings to borrowers, helping them to pay off their home loan faster,” Nathan says.

“It bypasses the banks, cutting interest rates in the process, uses technology to create efficiencies and passes these savings onto the borrower.”

At the time of writing, Athena’s variable interest rate for owner-occupiers paying principal and interest was 2.59 per cent while for investors it was 2.99 per cent.

Athena doesn’t charge ongoing application, account or exit fees, and offers customers a loyalty bonus discount of 0.01 per cent off their home loan rate each year for the first five years.

The discount is applied for the life of the loan.

“Athena exceeded $1 billion in settled loans in just under a year of operating, and customers switching to Athena from typical big bank rates save $61,359 per loan on average,” Nathan says.

Nathan says Athena is also proud to have immediately passed on the full rate cut the last four times the Reserve Bank of Australia has slashed the cash rate.

This equates to one per cent.

“A family with a typical home loan could save as much as $80,000 over the life of their loan,” he says.

“If they kept their mortgage repayments unchanged as rates fell, the savings could rise to $120,000 and cut five years off their mortgage.”

RateCity Research Director Sally Tindall says technological advances are driving the neobanks and home loan disruptors.

“It’s also being fuelled by the royal commission where banks didn’t come out of it looking as shiny as they once might have been,” she says.

“People have been looking for the next space to be disrupted, just like Uber has disrupted the taxi industry and Airbnb has disrupted the hotel industry.”

Sally says while neobanks and home loan lenders may end up disrupting the banking industry in a similar vein, they’re a long way from that position.

“About 75 per cent of us bank with the big four banks, with 74 per cent of us taking out our home loans with them and about 80 per cent for deposits,” she says.

Sally says following the royal commission the market is particularly competitive, and there are rates lower than what neobanks and home loan lenders are advertising.

At the time of writing, the lowest variable rates on RateCity’s books for owneroccupiers paying principal and interest are Reduce Home Loans at 2.44 per cent.

Homestar Finance offers the same rate if you have a 40 per cent deposit and Well Home Loans are offering 2.47 per cent.

“After the royal commission, banks are not writing home loans as much as they used to and they are competing in terms of getting new business in the door,” Sally says.

Other neobanks, including Xinja and Volt, also plan to offer home loans. Volt is still in its beta phase, but Xinja plans to launch its home loan later this year.

“The detail is still being worked on, and you can expect the usual range of features,” Xinja Founder and CEO Eric Wilson says.

“However, it will be delivered differently, in a way that increases flexibility for the customer and is aimed at ensuring they pay the loan off most efficiently.

“Part of our purpose is to get people out of debt faster.”

Xinja, which is 100 per cent digital and built for mobile, was granted a full banking licence in September last year.

It launched its app first and a prepaid card before transaction accounts and its savings account, called Stash, in January this year with an interest rate of 2.25 per cent.

In less than eight weeks, Stash accounts attracted about $400 million in deposits.

But when the RBA cut interest rates at the start of March, Xinja said “no more” to new Stash accounts so that it could keep its current clients on the same interest rate.

Eric says the goal for Xinja is to make its home loan quick and easy for consumers.

“We are aiming for an unconditional loan offer in less than 20 minutes,” he says.

“The technology we are using is 100 per cent cloud, fully API and is all about the seamless capture of data from 18 places, that is used to assess the affordability of the loans.

“We do this through APIs and the use of machine learning to continually set appropriate risk settings.

“This is about friction removal from a process that has remained largely unchanged for many, many years.

“Then it’s about proactively managing the loan down.”

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Kylie Dulhunty

Kylie Dulhunty is the Editor at Elite Agent.