Bunq has become one of the first digital banks to enter the mortgage market, announcing a plan to start lending €100m in its native Holland.
It marks Bunq’s debut into lending — having never ventured into other mediums like overdrafts or personal loans — and raises questions about whether rivals such as N26 or Monzo will follow suit.
The Dutch fintech will not offer mortgages directly to its customers; instead, it will use a third-party broker, who will tap into Bunq’s capital behind-the-scenes. That means customers “won’t know it’s [Bunq]” providing the mortgage, the fintech’s chief executive Ali Niknam confirmed to Sifted.
In effect, that makes Bunq’s mortgages, for now, an investment more than anything.
The bank has a strict ‘ethical’, low-risk approach to asset management and currently invests its users’ deposits — amounting to €433.4m at the last count — in European Central Bank bonds.
Now, Bunq is diverting around 25% of its users’ deposits into a new ‘real estate’ fund, having already agreed €100m in mortgage commitments on which it can earn a return.
The bank confirmed that €100m is Bunq’s mortgage limit; subject to capital requirements.
Niknam, who is Bunq’s sole investor, said there have been internal discussions about offering mortgages directly in due course. “The next step might be to go direct to customers…but the jury is still out there,” he told Sifted.
Mortgages: The new battleground?
In theory, mortgages should be a small source of revenue “from day one” for Bunq. Local media estimates Bunq’s mortgage fund will produce a 0.7% annual yield, having opted for low-risk, low-interest mortgages.
“There’s no cost — it’s an asset,” Niknam said.
Yet it could be some time before UK peers like Monzo and Starling follow in Bunq’s footsteps and take on home-loans.
Niknam points out the Dutch mortgage market has different protections and procedures to the UK, meaning it is more “straightforward” and less risky for Dutch banks to lend to homebuyers.
Moreover, two-thirds of Bunq’s home loans will be covered by the Dutch government’s insurance scheme, guaranteeing properties worth up to €310,000 in the event the borrower can’t repay the mortgage.
Meanwhile, in the UK, the risk of mortgage defaults has risen amid the economic uncertainty prompted by coronavirus. As a result, many UK banks — including challengers like Atom — have temporarily retreated from the first-time buyer market.
Meanwhile, smaller entities like Tesco and Sainsbury’s Bank have sold off their mortgage books, having been undercut on interest price by larger players.
“I can’t see most challenger banks getting into mortgages,” says Richard Davies, an executive at Revolut who is leaving the fintech next month.
“There’s barely a margin there with the price competition in the UK that HSBC has driven. You have to pay savers to get their money in and then you have a tiny interest rate back. It’s not attractive,” he said, adding that having interest rates at a historical low also wouldn’t help the cause.
In the meantime, digital banks like Monzo are trying their hand at lending with credit cards, overdrafts, personal loans and — in Starling’s case — business loans.
Nonetheless, incumbents will be watching Bunq’s move closely. One of the threats big banks have is that the younger generation could depend on newer players for their lending needs — banks’ main cash cow.
“The real threat will come from the impending generational wealth movement,” banking executive Steve Morgan wrote in a blog in March. “The majority of new loans will soon be offered mainly to people who are now in the 20-30 year-old range.”
He added that if there is the option to access a mortgage via a challenger bank, young people “will do so because they will favour these brands.”