Cost is only one factor, says lender
Non-banks are likely to be feeling the pinch of rising funding costs, but there are some advantages that put them ahead of mainstream banks, Mortgage Ezy says.
They are typically more flexible and assess loans on their merits, allowing them to fill gaps in the market, catering to specialty borrowers that banks cannot service, says the Queensland-based non-bank lender.
Mortgage Ezy’s comments follow a story in the Australian Financial Review on August 31, warning of a “big shake-up” underway for borrowers and savers chasing low interest rate loans, as banks and other financial institutions rethink strategies amid soaring funding costs.
The RBA will deliver its verdict on the official cash rate on Tuesday, September 6, when forecasts show it’s likely to raise the rate for a fifth consecutive month.
Read next: Is it time for official cash rate hikes to slow?
Changes in the ladder of highest savings and lowest borrowing rates are likely to be “under renewed pressure”, AFR reports.
The new wave of low-rate lenders can typically “leverage the balance sheet” of a larger parent, or the pool of savings from depositors. But financial chiefs say they expect some non-bank lenders to lose market share to the big banks, as they struggle to pass on higher funding costs to customers, the newspaper said.
Responding to how non-banks were being affected by rising funding costs, Mortgage Ezy founder and executive director Peter James (pictured above) told MPA funding between banks and non-banks could be summed up as a “two-tiered highway”.
As authorised deposit-taking institutions, banks derive funding from deposits (with only a small portion of excess lending sourced from professional markets) and can set rates for savers and borrowers at their discretion.
Non-banks fund their loans through wholesale markets, James said.
“Where funding for every loan is dictated by financial markets, we’re dictated, ultimately by what investors are demanding and, in this environment, with rapidly rising rates, investors are demanding a premium,” James said.
Deposit rates haven’t moved up in line with the RBA’s official cash rate increases, but in professional markets, the reverse is true.
“We’re already seeing the bond market 0.5% to 0.6% higher than where it was before the RBA started their rate rises … as non-banks are funding 100% of their loans through wholesale markets, they are definitely feeling the pinch right now,” James said.
Before the RBA started increasing the cash rate, non-banks were substantially under the banks’ variable pricing, particularly for prime loans (“mum and dad” clients), he said. The rate hikes have effectively brought things back to more of a “level playing field”.
“We were substantially under the banks because of our low-cost structure, and we passed on those savings to our borrowers,” James said.
“Today, because of the banks’ advantage with the deposits, that gap is no longer 1% or even 0.7% ... it might be 0.2% to 0.5%,” James said.
Read next: Mortgage Ezy sources funding for loan range
While other non-banks have had to pass on increases in funding costs, depending on the product, Mortgage Ezy was able to pass on either the full amount or some cases, less than the full amount, of each official cash rate rise.
But James said as with all lenders, rate rises represent potential increased cost. If professional markets remain at a higher rate, this will create additional pressure, he said.
“Some banks that are needing to replenish their funding have already had to increase their rates quite substantially above and beyond the RBA,” James said.
“Others like us have not, and are taking a wait-and-see approach,” James said.
In response to how Mortgage Ezy was able to carry some of the increase in funding costs, James said a large portion of its borrowers are specialty borrowers.
Mortgage Ezy specialises in the gaps that banks leave behind: many of its loans are not able to be sourced through the banks, he said. They include self-managed super fund loans, low-doc loans and non-resident and expat loans.
“We’re finding a huge demand increase for that sort of lending … these loans can’t be sourced from any bank, so non-bank lenders are getting more and more of this type of client as banks have toughened up on their criteria,” James said.
Although banks were becoming more competitive from a price perspective, their service standards weren’t always as high, he said. Many used credit scores and mechanical assessment techniques to assess clients.
“Non-banks’ strength is that they’re flexible, and that they’re holistic in their approach … we don’t assess anyone using a credit score: it’s all about the merits of the deal, and we’re looking to do the deal, not get the deal off our desk,” James said.
A blue-ribbon customer has lots of choices today – non-bank choices that are more flexible and possibly even still at a lower rate than the bank, he said. As time goes on, that gap may narrow.
“A borrower needs to look at more factors than just price … if they’re only looking at price, the competitiveness has definitely decreased from a non-bank perspective,” James said.
