The future of mortgage pricing: consumers to determine rates

by Julia Corderoy10 Nov 2014
As fierce competition has seen Australian banks’ net interest margins shrivel in the race to the bottom on interest rates, business analyst company FICO says using big data can help banks become more intelligent with mortgage pricing. It is called ‘performance based pricing’ and it may be the next big thing in mortgage lending.

Dr Andrew Jennings, senior vice president and chief analytics officer of FICO, told Australian Broker it is all about using data to determine the price sensitivity of consumers and then offering them a product and rate based on their sensitivity.

“It is about working with lenders to help them proactively make an offer to mortgage consumers. The financial services sector doesn’t have to have a one-size-fits-all model which says this is the price for that particular loan product. Performance based pricing is about coming up with an alternative, individualised deal structure. Using big data can help lenders price loan products more intelligently as a result of understanding more about the consumer they are dealing with.”

FICO has been working with a number of Canadian banks, which have experienced an increased demand in fixed rates – much like the Australian market. According to Jennings, big data can help banks refinance their fixed rate loans.

“One of the biggest challenges for lenders is how to reprice fixed-rate loans when it is time for renewal. A lender doesn’t want its book churning every three years, and have the customer go off to another lender. 

“By using analytics to understand a consumers price sensitivity and also their sensitivity to certain products – three-year fixed rate terms or five-year fixed rate terms, etc – we can mathematically figure out what offer to make each individual consumer to be able to trade off the competing objectives of renewing elsewhere, while also trying to increase the bank’s interest margins by 5 or 6 bps.”

When it comes to commission pricing, Jennings says commission works on a sliding scale where the lender will give the broker a “target rate” based on what the analytics says the consumer will be able to service. If the broker negotiates down from the target rate, commission will also go down. 

However, performance based pricing will allow brokers to have more control over the conversation as they will have a better understanding of the consumer, their price sensitivity and their boundaries.



  • by marty 10/11/2014 10:45:51 AM

    I don't like this model where the broker sets the rate to a degree. Fraught with conflict of interest issues. We are better of without it.

  • by Bottom Line 10/11/2014 11:09:24 AM

    Agreed marty. This is opening Pandora's box... But is a great way of making every bank customer unhappy. The biggest complainers would get the best deals.

  • by Old Broker 10/11/2014 2:14:03 PM

    If you are an employee and you are caught contacting existing borrowers happily paying X% and offer them a lower deal without the borrower first approaching the bank, you will be out on your ear as a loan writer before the client.