Rate rises give banks a leg-up over non-bank challengers

Non-bank lenders seeking to disrupt the $2 trillion mortgage market face a tougher grind in competing with established banks as interest rates rise and the banks tap cheap deposit funding and lure borrowers with cash-backs and lucrative discounts.

In a significant shift in the competitive environment, several non-bank lenders have in recent months jacked up mortgage rates by more than the Reserve Bank has raised the cash rate.

Non-bank mortgage lenders have faced  bigger increases in funding costs than banks.
Non-bank mortgage lenders have faced bigger increases in funding costs than banks.Credit:Peter Rae

RateCity said since the RBA started lifting rates in May, seven non-bank lenders had raised their rates on new loans by more than the RBA’s 2.25 cumulative percentage point increase, with Resimac-owned Homeloans.com.au and Firstmac both following this pattern this month.

Digital lender Athena Home Loans raised its rate for new and existing customers by 0.65 percentage points in July, and Nano Digital Home Loans raised its rate by the same amount last month, RateCity said.

The outsized rate hikes reflect rising funding costs in securitisation markets, where mortgages are bundled up and sold as bonds to investors. Non-bank lenders, which cannot take deposits, rely on securitisation for their funding. Nano and Athena’s price changes also reflect their commitment to offer new and existing customers the same rate.

Banks, in contrast, are getting a competitive edge by tapping into lower-cost funding from deposits, as interest rates on savings accounts have been much slower to rise than mortgage rates.

The chief executive of digital lender Tic:Toc, Anthony Baum, said there had already been a customer shift away from non-bank lenders in recent times, and he thought the trend had further to run. Tic:Toc’s funding comes from Bendigo and Adelaide Bank, also a major investor in the company.

Anthony Baum, founder and chief executive of digital mortgage lender Tic:Toc.
Anthony Baum, founder and chief executive of digital mortgage lender Tic:Toc.Credit:Ben Searcy

“It is a great environment for challengers that have a competitive funding proposition,” Baum said in an interview. “For securitisers it’s a problematic market because their funding costs mean that they are not competitive with a bank balance sheet for prime customers.”

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The market shift comes amid a surge in borrower refinancing, as banks compete fiercely by offering cash-backs and interest rate discounts to new borrowers, or those prepared to switch to a new lender.

Non-banks say the funding disadvantage they have will be temporary, arguing banks will ultimately face higher funding costs too.

Athena co-founder Michael Starkey said over the short-term banks had an advantage because deposit interest rates were rising more slowly than rates on loans, but he said Athena was still growing “really strongly” and its loan book was nearing $4 billion.

He added that Athena had cut its rates by 0.15 percentage points earlier in the year before the RBA increased rates, and said it was seeking to diversify its funding sources.

“Over the medium term we expect rate increases to be relatively neutral, because the same forces that drive up our wholesale funding costs also drive up bank funding costs and deposits costs. But in the short term, they are at an advantage,” he said.

RateCity research director Sally Tindall said before the RBA started lifting rates in May, the lowest variable rates in its database were from non-bank lenders, but currently the sharpest deals were from small banks.

“Competition among the low-rate lenders has been turned on its head since the RBA began lifting official rates,” Tindall said.

Resimac chief executive Scott McWilliam said banks would also face margin pressure in 2023 as their wholesale funding costs rose, and he pointed to the company’s focus on specific segments such as self-employed borrowers.

“Resimac has multiple audiences and product offerings, and we are able to service segments of the market not heavily influenced by the major banks, including the self-employed and asset finance markets,” McWilliam said in a statement.

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Source: Thanks smh.com