Heartland trials digital mortgage product

In what Heartland chief executive Jeff Greenslade is calling a "pilot" programme, the banking subsidiary is offering to lend an unspecified amount at lower interest rates than anybody else in the market.

Greenslade wouldn’t say how much Heartland has committed to the experiment. He rejects the idea that it's a bet but won't say whether the bank will cover its costs.

Borrowers face no fees and must either have at least a 20% deposit or 20% equity and be owner-occupiers. The only thing resembling a catch is that all of their dealings with Heartland will be digital and online.

"This is a limited offer. We want to test market appetite for that sort of digital channel," Greenslade told BusinessDesk.

Heartland's floating rate of 3.95% is the lowest in the market – its nearest competitors are Australia-based non banks, Bluestone with a 4.44% offer and Resimac with 4.5%. The nearest mainstream offer is Cooperative Bank and Kiwibank's 5.15%.

Heartland's two-year fixed rate, the most popular fixed term, is 2.97%, well below the next cheapest offers in the market, those of Industrial and Commercial Bank of China at 3.18% and HSBC at 3.2%.

The lowest mainstream two-year fixed rate offer is 3.55%, offered by Westpac, TSB Bank, Bank of New Zealand, SBS Bank and Kiwibank.

Only on the three-year fixed rate offer at 3.39% do a couple of niche players have lower offers with the nearest from a mainstream bank being TSB's 3.89% offer.

Given that Heartland's deposit rates currently are 2.8% for one, two and three-year terms, its profit margin barely exists on the one-year offer and is still a slim 59 basis points on the three-year offer.

"The key to this is whether there's appetite for a completely digital experience in the home loan market," Greenslade said.

Keeping Heartland's costs low in "on-boarding" mortgage customers will be critical to whether it succeeds or not.

The company is selling the idea of "taking some of the friction out of the home-loan application process.

"Customers can get back to what matters most to them by spending less time at a bank and more time making memories with friends and family."

Greenslade said Heartland had kept its offering as simple as possible. "Part of the digital platform is that you have to be able to engage with as few questions as possible" but still enough to ensure a sound basis for approving or rejecting loan applications.

Nevertheless, Heartland is banking on being able to target a sizeable chunk of the mortgage market.

Greenslade said it's "an interesting question" whether there are sufficient millennials and GenXers for whom their mobile phone is their preferred medium for interacting with financial institutions to make Heartland's offer successful.

Presumably the extraordinary interest rates on offer will provide their own allure.

"The digital world is very iterative: explore, evaluate and learn very quickly, adapt and keep going."

But Heartland does have a fallback position, or plan B, if it decides the experiment won't work longer term.

It will be looking at making the loans eligible to become repo securities – securities the Reserve Bank will accept in exchange for providing liquidity.

"We're still confident that these are good assets. If all else fails, those loans go from low-margin loans to high-margin liquid assets," Greenslade said.

While the experiment is using the banking subsidiary's funds, if it's successful, then Heartland will look at funding further lending through the wholesale market – it already uses wholesale funding from outside the bank for its Australian reverse mortgages business.

Such wholesale funding would be below the bank's average cost of funds and would therefore provide better profit margins, Greenslade said.

When the bank's results were released two weeks ago, Greenslade signalled Heartland may expand the definition of the niche banking products strategy that it has developed since listing on the NZX in February 2011.

The group, which operates Heartland Bank in New Zealand and a reverse mortgage business in Australia, has long pursued a strategy of seeking out parts of the market where the major banks don't operate, so Heartland can have a "best or only" product.

That strategy has led it into providing reverse mortgages in both Australia and New Zealand and motor finance in the wake of so many finance company collapses. It provides unsecured small business loans through its digital Open-for-Business platform, a business it has refined and road-tested in New Zealand and has now introduced in Australia.

More recently, Heartland has started to target millennials with its YouChoose product, a digital interest-bearing savings account that has an optional overdraft facility attached.