THE WA Government has overhauled its low-cost housing assistance program, Keystart, shifting its distribution to mortgage brokers in a move that could substantially increase its loan book and profitability.
THE WA Government has overhauled its low-cost housing assistance program, Keystart, shifting its distribution to mortgage brokers in a move that could substantially increase its loan book and profitability.
Keystart already has a $1.5 billion loan book, representing about 18,000 mortgages, but expects widening public access from a handful of terminating building societies to 43 approved brokers will add at least a further $500 million to that within two to three years.
The 13-year-old program already reaps a surplus of between $12 million and $20 million each year, though much of this has been used for capital adequacy requirements.
The expectation is that Keystart’s unusual position in the market, combined with a wider market penetration delivered by brokers, will soon provide up to $10 million a year in surplus for the government coffers.
Department of Housing and Works executive director finance John Coles said there had been a “fair bit of soul searching” regarding the potential for Keystart if the business model was changed.
He said the home loan market had changed and brokers had become more mainstream.
“We thought it was important to hook into that,” Mr Coles said.
But widening distribution is not the only change that will boost the program’s ability to deliver more funds back to government.
Keystart customers are high churners. Despite Keystart loans’ very low deposit ($2000 or 2 per cent, whichever is higher), these customers rarely stay in the program long, preferring once they have a good credit history to move to a traditional mortgage provider that offers a range of additional products and services.
Mr Coles said the average Keystart loan period has fallen to between two and three years from between four and five years.
While that might sound bad for business, it seems it is not.
The constant churning means the loan book doesn’t grow as quickly as new business is generated. That, in turn, means less money is needed to be held in reserves for the targeted 8 per cent capital adequacy purposes and instead can be recorded as surplus.
Keystart sees churning as positive, showing that the government program does its job of getting people into their own homes even more efficiently before seeing them leave for the private sector.
Mr Coles said the aim was, at this stage, to cap the loan book at about $2 billion with any decision to go above that in the government’s hands.
“We don’t want to go into the banks’ market,” he said.
In fact, too much growth would also make it harder to meet the capital adequacy needs of the loan book and record a surplus.
“Once we get the capital adequacy right we have the option to use the money in other ways,” Mr Coles said.
It was likely any surplus would be used by the department to fund more public housing. For instance, Mr Coles said a surplus of $10 million could build 100 new homes on top of the 2000 it already built each year, which barely made a dent on a waiting list of 14,000.
Keystart’s overseers don’t expect a shift in distribution to increase the risk profile of the loan book. The program has arrears of about 2 per cent and defaulters are virtually non-existent, making it a very low risk portfolio – something that obviously enhances profitability.
In restructuring Keystart to use brokers, loans assessment has been taken from the credit societies and centralised at an expanded administration function outsourced to accounting and IT advisory firm Stamfords.
Mr Coles said this would help keep risks down. Other risk management practices would be the careful vetting of brokers and securing of new administration staff with experience at managing independent brokers.
p See Editorial, page 8.
Keystart already has a $1.5 billion loan book, representing about 18,000 mortgages, but expects widening public access from a handful of terminating building societies to 43 approved brokers will add at least a further $500 million to that within two to three years.
The 13-year-old program already reaps a surplus of between $12 million and $20 million each year, though much of this has been used for capital adequacy requirements.
The expectation is that Keystart’s unusual position in the market, combined with a wider market penetration delivered by brokers, will soon provide up to $10 million a year in surplus for the government coffers.
Department of Housing and Works executive director finance John Coles said there had been a “fair bit of soul searching” regarding the potential for Keystart if the business model was changed.
He said the home loan market had changed and brokers had become more mainstream.
“We thought it was important to hook into that,” Mr Coles said.
But widening distribution is not the only change that will boost the program’s ability to deliver more funds back to government.
Keystart customers are high churners. Despite Keystart loans’ very low deposit ($2000 or 2 per cent, whichever is higher), these customers rarely stay in the program long, preferring once they have a good credit history to move to a traditional mortgage provider that offers a range of additional products and services.
Mr Coles said the average Keystart loan period has fallen to between two and three years from between four and five years.
While that might sound bad for business, it seems it is not.
The constant churning means the loan book doesn’t grow as quickly as new business is generated. That, in turn, means less money is needed to be held in reserves for the targeted 8 per cent capital adequacy purposes and instead can be recorded as surplus.
Keystart sees churning as positive, showing that the government program does its job of getting people into their own homes even more efficiently before seeing them leave for the private sector.
Mr Coles said the aim was, at this stage, to cap the loan book at about $2 billion with any decision to go above that in the government’s hands.
“We don’t want to go into the banks’ market,” he said.
In fact, too much growth would also make it harder to meet the capital adequacy needs of the loan book and record a surplus.
“Once we get the capital adequacy right we have the option to use the money in other ways,” Mr Coles said.
It was likely any surplus would be used by the department to fund more public housing. For instance, Mr Coles said a surplus of $10 million could build 100 new homes on top of the 2000 it already built each year, which barely made a dent on a waiting list of 14,000.
Keystart’s overseers don’t expect a shift in distribution to increase the risk profile of the loan book. The program has arrears of about 2 per cent and defaulters are virtually non-existent, making it a very low risk portfolio – something that obviously enhances profitability.
In restructuring Keystart to use brokers, loans assessment has been taken from the credit societies and centralised at an expanded administration function outsourced to accounting and IT advisory firm Stamfords.
Mr Coles said this would help keep risks down. Other risk management practices would be the careful vetting of brokers and securing of new administration staff with experience at managing independent brokers.
p See Editorial, page 8.
