In Latin America’s highly concentrated banking industry, financial technology startups are venturing into one of the region’s most undeveloped and tightly held loan markets: mortgage financing.
Recently, two fintech startups launched in Latin America to offer faster, more convenient access to mortgage lending in the region.
Founded in 2021, Mexico-based Saturn5 is gearing to launch in the North American country, offering housing loans as its main product. In Colombia, Toperty, a real estate fintech, facilitates clients’ access to housing loans at banking institutions in a region where many do not have the adequate score that would make them eligible for long-term financing.
In Latin America, neobanks have increased in size over the past few years, especially during the pandemic, signing up millions of customers and expanding their products. However, a majority have struggled to grow heavily into credit, and banks continue to dominate the scene in a challenging segment such as mortgages.
‘Housing loans complex’
“Housing loans are more complex products (than other loan segments),” Nicolas Maldonado Jacobsen, COO and Co-founder of Toperty told Fintech Nexus. “There is a greater risk since terms for repayment are very long.”
For that reason, most fintechs have shied away from real-estate lending. Nubank, the largest neobank in the region with over 60 million clients, does not yet put forward such a product.
Most fintech lenders have prioritized growing other businesses, such as payments, cards, and, in some cases, personal loans.
For mortgage financing, clients continue to rely mostly on traditional banking institutions. In Brazil, the region’s largest loan market, roughly 70% of all assets are held by a handful of 5 large banks. In the case of mortgages, in particular, that concentration is even higher.
That also means there is significant room to grow further. Real estate financing accounts for roughly 10% of GDP in Brazil and Mexico, less than 20% in Chile, and far below developed economies such as the U.S., Great Britain, and Germany, where the ratio ranges from 45% to over 70%. In addition, in most Latin American economies, this financing is costly on relative terms.
Maldonado singles out the difficulties of providing mortgage credit. “The LatAm, real estate market, is not as dynamic as in developed economies,” he said. “There is very little data available, and asset turnover is not efficient.”
Holding property not easy for banks
For banks, holding on to a property can be a problem.
“Real estate loan recovery implies initiating legal actions that are not easy in most cases,” Ted Senado, CEO and Founder at Mexican Monific told Fintech Nexus. That is why, he said, numerous banks prefer just to sell the distressed portfolio to specialists.
For that matter, new open banking frameworks, a better flow of financial information, and growing digitization all add up to new possibilities for the underdeveloped sector.
For fintech experts, greater financial data availability will embolden incumbents and fintechs to take more risks. “The ability to know your client’s risk potential is one of the greatest challenges of a credit fintech today,” said Jihane Halabi, a fintech author and consultant in Brazil.
Strictly speaking, Toperty does not offer regular house financing. The way it works, the company buys the property upfront for the client, then works up a monthly payments plan with them, and charges rent until the user amasses around 20 or 30% of the house value. At that point, the fintech helps the client get a mortgage loan at a bank and then cancel its outstanding debt with Toperty.
Homes as collateral
In Brazil, Creditas is one of the few fintech unicorns with a clear focus on using homes as collateral. The company takes borrower’s real estate as collateral to offer lower rates for personal loans.
“Real estate could be a very attractive asset class for fintech,” said Maldonado. “This way, the risk of financing long term decreases, and startups can feel comfortable with the house as collateral which can be liquidated in the event of default.”
To be sure, mortgage financing in the broader market has grown massively amid the pandemic, as traditional banks relied on secured loans to weather the worst of Covid-19.
In the future, though, the outlook for real-estate financing becomes bleaker, as rising interest rates globally and in most Latin American economies are affecting already high bank rates.
For that matter, fintech players argue that new companies must work on ironing out some of the inefficiencies in the traditional mortgage financing process today. Loans can take longer to be granted at a higher cost than in other developed economies.
“When it comes to home loan products, fintech players must innovate,” said Maldonado. “Models such as “rent to own,” “co-investment,” “real estate crowdfunding,” or “reverse mortgages” will be very relevant to creating new products that can solve both basic and more complex needs.”