Bank turns off digital home loans

As a result of this surprise decision, Heartland will wind down its portfolio as each loan matures.

The book fell to $246.5 million at Dec 31 from $311 million at June 30 and Heartland expects 80% will have been repaid by the end of this calendar year.

The peak of the product appears to have been in the December 2023 half year when it reached $328.6 million after 11.1% growth in that six months.

Heartland initially launched the product in March 2020 but was stymied by the onset of the covid pandemic.

However, the $50 million of conditional home loan approvals post this launch (very little actually settled) was sufficient indication of demand that Heartland relaunched the product in October 2020.

The product was available only to those with at least 20% equity, for owner-occupied, stand-alone houses on a single section in major centres – essentially the most vanilla type of home loan but which accounts for the biggest part of the market and also the safest from a lender’s perspective.

On the conference call with analysts, the new chief executive, Andrew Dixson, was asked why Heartland had decided the product was no longer core.

“They don’t meet the return on equity (ROE) threshold,” was Dixson’s brief answer.

Heartland’s decision is curious in light of the fact that Macquarie Bank has followed a digital strategy in Australia and has successfully grown its market share to 5.6% at Sept 30 last year in the last few years and many analysts have attributed its success to driving down the profit margins of the major banks.

ASB Bank owner, Commonwealth Bank of Australia’s net interest margin (NIM) has dropped from 3.1% in June 1999 to 2.08% in the six months ended December last year – ASB’s NIM in the latest six months rose nine basis points to NIM to 2.30% in the same six months from 2.21% a year earlier and 2.24% at June 30 last year.

Reverse mortgages

Growth in Heartland’s reverse mortgages continues at double-digit rates but has slowed from the 2024 financial year from 20% to 15% in the six months ended December.

Heartland’s New Zealand reverse mortgage portfolio rose by $82 million, or 15.3%, to $1.15 billion in the six months while net operating income rose 22.3% to $29.2 million.

The main reasons for borrowing remain home improvements, debt consolidation and easing of living expenses, the company says.

It is forecasting that growth will fall a little to 15% in the second half but that it will then pick up to 15.7% for the year ending June 2026.

Heartland says it will be launching a new product designed to allow people to access the equity in their home to enable the purchase of a retirement village property.

Non-performing loans were less than 0.5% of the portfolio but the average loan-to-valuation ratio (LVR) has crept up to 24.6% from 23.5% at June 30 last year and from 21.3% at June 30, 2023.

The number of loans with LVRs above 75% rose to six from two at June 30 and zero before that while the average age of the youngest borrower among new customers fell to 73 from 77.

However, the average initial LVR fell to 8.9% from 9.1% at June 30 last year and 9.8% in June 2023.

The amount of originations rose by $9.8 million to $106 million compared with the previous first half while repayments at $80 million were up by $22.5 million on the previous first-half.

Heartland’s compound annual growth rate from the portfolio eased to 17.3% from 17.5% at June 30 but was up from 16.4% at June 30, 2023.

The Australian reverse mortgage book grew by $138 million to $1.97 billion in the latest six months.

As foreshadowed last week, Heartland’s net profit for the six months fell 90.4% to $3.6 million compared with its previous first-half net profit of $37.6 million with it writing off $49.6 million of impairments.