Why Can’t Australians Get Home Loans from Non-Banks Right Now?
Last updated on December 16th, 2022
Why Can’t Australians Get Home Loans from Non-Banks Right Now?
Non-banks proliferated the lending market from the 1990s until the early 2000s. The boom in this sector accounted for approximately 50% of the market. It was before the global financial crisis reared its ugly head.
Today, non-banks account for less than 7% of Australia’s lending market. A decent number of non-bank financial institutions still serve the home loan needs of borrowers, but with a surprising twist: new home loan applications have screeched to a halt – at least for the time being.
So, what caused the dramatic change in the lending landscape? Are the soaring inflation rate and skyrocketing funding costs to blame?
In an article on 31 August 2022, the AFR warned of a “big shake-up” for borrowers and savers chasing low-interest rates and high returns. Non-banks – specifically small players – are now feeling the punch amidst escalating funding costs. They are adopting a wait-and-see attitude.
What is a non-bank lender?
A non-bank is a financial institution that offers financial services similar to those of a traditional bank. They comply with legal and industry codes like ASIC laws, National Consumer Credit Protection Laws, Australian Consumer Law, Privacy Law, and the e-payments code. The Australian Prudential Regulatory Authority (APRA) only sits in an advisory capacity. Thus, they are prohibited from using customer deposits as a source of funds for company operations.
Throughout the years, non-banks have been game-changers who levelled the playing field by creating a competitive market wherein borrowers can shop for cheaper loan rates. They also fill in the gap for specialty or high-risk borrowers who cannot get the services of traditional banks. But the recent global financial crisis changed the game – much to the disadvantage of non-bank lenders who suddenly find themselves grappling for fund sources amidst high-interest rates and a relatively hostile credit market.
How are non–banks funded?
Non-banks rely on market-dictated wholesale funds from Australian banks or overseas institutions to finance 100% of their loans. They also secure funds through mortgage-backed securities. These are bundle mortgages sold to private investors and large organisations.
How do escalating funding costs affect non-banks?
The recent interest rate hike has made funding costs too expensive. Non-banks must pay around 1.50% to 1.70% in addition to a 2.70% Bank Bill Swap Rate (BBSW) to investors of mortgage pools. It means the wholesale funding costs far outweigh the interest rates received from new loan applications. The spread, or the gap between selling a futures contract and buying another, is no longer profitable. A high inflation rate diminishes the purchasing power of money received from borrowers compared to money loaned out. In a scenario of rapidly increasing rates, investors demand premiums on mortgages. Two problems now confront non-bank lenders – the source and cost of funds.
Are homeowners affected by a cut in funding costs?
A cut in funding costs would force small non-bank players out of the equation, or at least until interest rates have stabilised. It is unknown when the rates will peak and eventually go down, but until then, non-bank lenders would have to put growth plans on hold. A market gap would cause demand to soar and push property prices.
At this juncture, most Aussies fear that their dream of owning a house will not materialise. The impact of the high inflation rate - which currently stands at 5% and may increase to 7% by the end of this year - diminishes the purchasing power of potential buyers. The balance of scale is now towards the savers, not the borrowers.
If you're still wondering Why Can’t Australians Get Home Loans from Non-Banks Right Now? Then it may be worth speaking with a mortgage broker today >
