Home loans: Nicola Field A look at reverse auction sites
If you need a mortgage, an online site where lenders bid against each other to win your business could provide the right deal
The home loan industry is being flipped on its head, with lenders openly bidding against each other through on an online marketplace to win a would-be borrower’s business. These so-called reverse auction sites are not especially new but their number is growing. Macquarie Bank-backed Lendi led the charge in 2013, followed by Flongle and a range of other platforms, including HashChing, LoanDolphin, Lodex and Joust. One of the newest players to enter the market, Loanbid, opened its doors in March 2018.
The basic principle of reverse auction sites is pretty straightforward. Loanbid partner Paul Dwyer says customers make one online application listing their details and loan requirements. Borrowers state whether they’re looking to buy a home or refinance an existing loan, nominate their preference for a fixed or variable rate, and tick off their choice of features such as redraw or offset.
From here, lenders and brokers assess the information provided and enter into a virtual auction, aiming to win your business with their best bid. All offers are shown on an online dashboard (lenders can also see what the competition is offering) and are ranked according to the total cost of the loan, with the lowest cost first.
“Borrowers need to wait for just 48 hours for lenders and brokers to come back to them with a loan best suited to their needs and financial situation, with the borrower to choose the right loan,” says Dwyer. He says borrowers are free to leave the process at any time, and there is no obligation to accept any of the loan bids.
It all sounds very appealing – quick, effortless and seemingly without the need for a make-or-break visit to a bank manager. “We put the power of choice back in the hands of borrowers, who can potentially access thousands of loans based on the information they provide through an obligation-free bidding process,” says Dwyer.
That may be the case but home loan auction sites also benefit the lending industry. As Dwyer notes, lenders and brokers can tap into a source of live leads without any upfront cost. The question is, do home loan borrowers come out on top?
The first thing to be aware of is that reverse auction sites do not deal with every lender. Just like mortgage brokers, they typically work with a panel of lenders. As a guide, Joust lists 18 lenders on its site, HashChing identifies “access to 80+” lenders and Lendi claims to work with 30 “major” lenders. There’s a blend of some of the big banks as well as smaller lenders but the entire market is not covered. That said, mortgage brokers can also bid for your home loan, so the choice of lenders open to consumers can potentially be much broader than those directly listed on each platform.
Credit score protected
Using a reverse auction site generally comes at no cost to borrowers because, as with mortgage brokers, the platform earns a commission from lenders. One exception is Flongle, which gives borrowers the choice of paying an upfront fee of $399 to post for a mortgage, the idea being that this eliminates any bias associated with commissions.
A strength of home loan auction sites is that posting for a loan shouldn’t impact your credit score. Personal details are submitted using an identifying number so
your name remains confidential. This prevents lenders checking your credit rating. By contrast, whenever you directly apply for a loan it’s recorded on your credit history. Multiple loan applications can be a red flag for lenders, who will question why you’ve needed to make more than one application. Without concerns about possible damage to your credit score, reverse auction sites can be a handy tool for a do-it-yourself home loan health check.
However, this anonymity can also be a weakness. Once you’ve selected your preferred loan, the auction site passes your personal information over to the winning lender to finalise your application. It’s at this point, when the lender has a better understanding of your circumstances, that the deal can sour if it turns out you’re not so eligible for a super low rate after all.
The likelihood that a loan with your winning bidder falls through can hinge on the accuracy of the information you initially provide. But being offered a decent rate in the first place can also depend on whether your circumstances fit certain guidelines. Joust, for instance, makes it clear that customers with a good credit score, a steady income and a minimum of 20% equity or deposit are its ideal customers. If your situation is more complex – for example, you’re self-employed, you need the help of a guarantor to buy a home or you wish to hold the property in, say, a trust rather than in your own name – you may be better off speaking directly with a lender or mortgage broker.
There’s also no getting around the fact that it still pays for borrowers to do their homework. “Independent of the service that consumers use to purchase their loan, they need to make sure the offer they are going with is competitive and has the features and flexibility they need,” says Mitchell Watson, group manager, research and ratings, at Canstar.
Other factors to consider
For example, a very basic borrower description posted with Lendi for a loan of $400,000 secured by a $500,000 property came up with some preliminary matches: Auswide with a rate of 3.59%, Bank of Sydney at 3.63% and Macquarie Bank at 3.79%. These are all good rates. But according to Watson, the lowest variable rate based on similar loan parameters on Canstar’s database is a tiny 3.44% available through Reduce Home Loans.
But a low rate is just one aspect to weigh up in your choice of home loan. “The cheapest offering may not always be the best if it doesn’t come with the flexibility that you may need,” says Watson. And this is a potential weak spot of reverse auction sites. They put the onus on consumers to work out the best loan for their situation.
It’s on this score that James Symond, CEO of Aussie Home Loans, offers a cautionary perspective. “In these days of tighter scrutiny of lending practices, major lenders are now more concerned about the validity of loan applications and compliance,” he says. “Many of these new platforms do not pass muster on both fronts.
“Consumers and lenders demand face-to-face contact to ensure loan applications are totally legitimate, and that the loan meets the needs and aspirations of consumers.”
Without a thorough understanding of different loan options and structures, borrowers relying on a reverse auction site alone could opt for a home loan that’s not entirely suited to their circumstances.
The reality is that today’s home loan market is very competitive and, as a bonus for consumers, reverse auction sites are adding to the level of competition. Watson notes that since January this year Canstar has observed over 50 lenders change their interest rates. “When consumers are in purchase mode it is important that they are checking what the best interest rates are,” says Watson.
This can make home loan auction sites worth a look, particularly if your circumstances are straightforward. Just don’t assume you’re getting the lowest possible rate across the entire market or that the loan and its structure truly match your needs.
“The cheapest loan may not come with the flexibility you need”