KiwiSaver scheme funding new cheap floating rate start up

A new fintech is offering residential floating mortgages funded by KiwiSaver scheme Generate at rates well below the major banks. 

Believed to be one of the few New Zealand mortgage platforms using KiwiSaver funds to finance mortgages, Indi (The Independent Mortgage Company) is offering a floating rate of 5.19% compared to the average major bank rate of 6.46%.

Generate, which is providing the funding, has 165,000 KiwiSaver members, nine products and $6.6 billion under management.

Unlike the big banks, Indi offers only floating rate mortgages. It doesn’t have fixed rates, revolving credit or offset loans.

And, like mortgage platform Dosh’s tie-up with Westpac, Indi does not offer any mortgage or financial advice. It says clients should seek that themselves.

Helmed by Anand Ranchord, a previous Kiwibank innovation chief and board member of FinTechNZ, and David Woods, a former Kiwibank head of model development. Backing them up on the board is independent director Craig Stobo, Financial Markets Authority (FMA) and Local Government Funding Agency chairman, and a former chief executive of BT Funds Management.

Indi has been developed under the radar for several years. On LinkedIn Ranchord says he and Woods knew there was a better way to do mortgages.

“We believe Kiwis are getting a raw deal from the big banks, and we set out to challenge this model. Cutting out all the big bank fat, especially when it comes to mortgages, lets us offer the best floating rate that will save money and feel like a breath of fresh air.”

On it’s just established website, Indi says its philosophy is to have a floating rate at least 0.20% cheaper than the big bank fixed rates over the next year on average. 

The mortgage company says the major banks’ floating rates are usually at least 1.50% higher than their fixed rates.

“Kiwis have grown up with this and think that that floating rates must be more expensive to the bank and they have to pass that cost on.

“That’s completely wrong. There is actually no reason why the major banks’ floating rates are so much higher than their fixed rates.

“In Australia, floating rates are about the same as fixed rates, and the vast majority of customers there have a 100% floating rate mortgage.”

“We don’t charge a premium for floating rates. We like things simple, because if we’re simpler than the banks then kiwis can choose us without needing advice or getting confused,” Ranchord says.

Indi is pitching its platform at saving borrowers money even on floating rates. It says when interest rates are falling, its floating rate will initially be a bit higher than fixed rates because that fixed rate stays the same over one- or two-year terms, but its floating rate will drop each time the OCR declines. Over the year that should save money, on average. “Borrowers can ride rates down.”

However, when interest rates are rising, Indi says for the first part of the year a borrower will be saving money, and in the second half of the year floating rates could end up higher than fixed rates. The company says it sets pricing so a borrower should save money on average over the course of a year.

Institutional funding

Indi says it can offer the cheaper floating rates even though it doesn’t have access to what it calls the major banks’ “cheap deposits” drawn from the bank accounts of everyday Kiwis.

By offering the service of operating bank accounts, banks feel entitled to use the money for lending without paying their customers a high interest rate on it.

Indi gets its funding from institutions that definitely want a reasonable interest rate for it, resulting in a higher cost for funds than the big banks have.

However, the tables are turned for the other parts of the equation, Indi says.

First, it has much lower operational costs than the big banks, which are notoriously inefficient.  Second, Indi requires a much lower profit than the big banks, which are among the most profitable in the world, with the profits siphoned off to their Australian owners.

“So, although Indi isn’t a bank, we have lower profit requirements and lower costs,” Ranchord and Woods say.

Stuck on fixed rates

At the end of last year mortgage borrowers switched to floating and short-term interest rates in droves in the expectations of cuts to the OCR until the middle of this year. That is now tailing off as the RBNZ nears the end of this interest rate cycle and borrowers are switching back to fixed rates as the major banks are offering a two-year term at 4.99%.

Ranchord and Woods say the major New Zealand banks prefer mortgage borrowers to be on fixed rates because that locks them in. It is even better for banks if a borrower has a range of fixed terms that overlap, so there’s never a good point where all a borrower’s lending can be switched to another bank.

“Big banks want customers to be on fixed rates, so they make floating rates unreasonably high. If they dropped their floating rates significantly it flows through to reduced margin overnight – a huge hit to their profit.

“To drop floating rates significantly, the banks would have to increase fixed rates significantly. However, any bank doing that would instantly be uncompetitive with the other banks. So they’re stuck.”

The big banks haven’t necessarily sat down together and deliberately decided to set floating rates so high based on these bad reasons, it is just how things have evolved, and they see no reason to change, Ranchord and Woods say.

No big bank puffery

For borrowers interested in a floating rate mortgage, and who have all the information about their property/s plus income and expenses handy, the website says it takes 10-15 minutes to apply.

Direct, online mortgages save time and money, Ranchord and Woods say. “No big bank puffery. No big bank ads. Even no big bank buildings. All of which means no big bank waffle to deal with and no big bank overheads to pay.”

They say being independent of banks means they can think about things differently. “We can make improvements to how mortgages are done, save customers money by being digital first and by striving to make getting a mortgage less frustrating.”

Indi also has a panel of lawyers who will do the conveyancing, avoiding the need for a borrower to use their own lawyer. It covers the cost of conveyancing if a borrower uses a panel lawyer.