Periodically, concerns arise regarding the payment structure of bond originators such as O-YES Home Loans, often questioning whether the commissions paid by banks to originators result in higher interest rates for consumers. However, the reality is quite the opposite. Consumers who obtain bonds through an originator typically secure lower interest rates than what they could have negotiated independently.
It is crucial to recognize that the commissions received by originators are separate from the interest rates charged to consumers. Banks incur operational costs when acquiring new bond business. In the past, these costs encompassed advertising expenses, salaries, benefits, and infrastructure required for a large number of bank staff to handle and assess bond applications, provide advice on various bond options and deposit benefits, process applications through approval stages, and oversee successful applications until final approval.
Now, a significant portion of these tasks are performed by bond originators, enabling banks to employ fewer home loan staff. In essence, originators contribute to substantial operational cost savings for banks, and the commissions received by originators come from these savings.
Meanwhile, the interest rates banks charge on bonds are determined individually based on each consumer’s risk profile. This risk profile remains the same whether a consumer applies for a loan directly through their bank or via an originator like O-YES Home Loans. The key distinction is that when applying through an originator, consumers benefit from multiple lenders competing for their bond business.
Through a multiple-lender application process, prospective borrowers complete a single application and provide supporting documents, receiving quotes from at least three, and often four, banks interested in becoming their home loan provider.
Furthermore, different banks have varying tolerance levels for each consumer’s risk profile. Therefore, the quotes received from these banks will feature differing interest rates, with an average variance of 0.5% and sometimes even more.
Applying for a bond through an originator ensures a transparent process that empowers borrowers to select the best (lowest) interest rate available to them based on their risk profile. If they were to apply directly to only one bank, they would never know if they secured the most favorable rate.
This distinction is crucial since a 0.5% difference in interest rates can result in substantial savings over the lifetime of a home loan. For instance, on a 20-year bond of R1.5 million, the potential savings amount to over R120,000 in interest payments throughout the bond’s lifetime, along with an annual reduction of R6,000 in monthly bond installments.
