Over the past few years, banks’ revenues from mortgages have been on the decrease. It is due to an intense competition between banks as well as the decreasing interest rates resulting from the European Central Bank policies. Banks are therefore attempting to compensate for the loss of mortgage revenue by revenue from other products. Simply put, if the bank does not make money off of you and your mortgage (or makes too little), it tries to make money off of you elsewhere.
What is a mortgage cross-sell?
If a bank simply increased mortgage interest rates to increase its revenue per client, its offer would not be attractive for the clients. That is why banks prefer to employ a less transparent, albeit, from their point of view, a wholly rational strategy: setting a low (attractive) mortgage interest rate, but under the condition of taking out other products. Cross selling means that apart from the product you have been meaning to purchase, you also have to purchase another product or products which may or may not be related.
Mortgage cross-sell – most common products
In practice, when engaging in cross-selling banks usually use their own products and the products of the banking group (e. g. insurance company or asset management – management company). These are mostly products such as:
- current account
- credit card
- authorised overdraft (overdraft account)
- property and household insurance
- loan (debtor) insurance
- unit-linked life insurance
- travel insurance
- life insurance
- mutual fund investment programmes
Products sold by the bank together with the mortgage should be considered from two aspects:
– whether they are included in the loan agreement
– what the costs of these products are, meaning you should add these costs to the monthly mortgage instalment
A cross-sell included in the loan agreement is a favourable solution for the bank, as it legally binds the client to use further products and/or meet additional requirements. However, this solution is less favourable for the client because it is not flexible. If the client does not meet one or more requirements laid down in the agreement, the bank may impose a sanction on them, most commonly in form of an increase of the mortgage interest rate or a contractual penalty.
An example of a mortgage cross-sell included in the loan agreement:
The Debtor commits
to perform a regular monthly credit turnover amounting to no less than EUR 750 credited to a current account maintained by the Bank,
as well as to ensure that at least three regular payments shall automatically be executed from this account monthly (a SEPA standing order or authorisation of a SEPA direct debit apart from the loan repayments performed by direct debit as established),
as well as to execute at least five payments by payment card,
and simultaneously, the Debtor is to have concluded a property insurance contract through the affiliated Insurance Company,
and simultaneously, the Debtor commits to the duration of the above-mentioned insurance relationship equal to the entire period of duration of this Contact.
The bank is entitled to increase the interest rate by 0.3 % p. a., should a failure to meet one or more of the above-mentioned requirements be proven at any point during the whole period of duration of the loan relationship.
Other than including the specific conditions of the cross-sell in the loan agreement, a common practice is that within the loan agreement the bank refers to a different document governing the conditions of the cross-sell. This document may be subject to change over time. In practice, the client may thus start with a 0.5% discount on the annual interest rate in exchange for transferring 1.5 multiple of the instalment/no less than EUR 200 to a current account maintained by the bank, while after some time they might also be obliged to transfer a specific minimum amount to a savings account or to mutual funds.
In terms of mortgage lending, some banks’ discount policy lies within the competence of the branch manager or the regional manager. That means than in practice the manager has a specified volume of discounts available, which they can use during the month to provide interest or fee discounts. However, in most cases this discount is coupled with the requirement to take out one or more products which the branch is to sell (but is unable to fully meet the targets). These are mostly insurance of the debtor (life insurance), mutual fund investment program, credit cards etc.
In case of a cross-sell not included in the loan agreement, the clients’ loan agreement does not include direct sanctions for annulment and/or failing to use these products. Subsequently, what often happens in practice is that to get a lower interest rate, the client takes out a product which they will cancel after a few months. This type of cross-sell is more favourable for the client compared to a cross-sell included in the loan agreement.
Regardless of whether a cross-sell is included in the loan agreement or not, try to approach it reasonably – thinking money first. If the bank requires you to use a current account which you can have free of charge, then a cross-sell does not pose a problem for you. However, if the bank conditions an attractive interest rate on taking out an insurance policy by the debtor, make sure to calculate what the real cost of the mortgage would be – including the insurance. (Also, you would certainly find a more favourable insurance from the aspect of the price/value ratio.)
When searching for the best mortgage, do not look at the interest rate only, but make sure to compare the instalment amount and the debt amount at the reset date.