Finance Market Update - 22 November 19
Competition is fierce for home loans right now and set to continue to intensify. In this fortnights update we talk about non-bank lenders moving into the prime space and what that means for property prices and borrowers.
Borrower demand mismatch with banks lower approval rates is spurring on the growth of the non-banks and their move up the ladder into prime territory.
People are moving away from the major banks, and banks in general, to non-bank lenders at a very high rate.
This is a trend we have been seeing for a while as non-bank lenders move out of the shadows and take market share and customers away from the traditional banks. In a recent report (which is only indicate as it only covers about 35% of lending flows) from NAB and FAST noted the big four banks market share dropped by 10 points while lending by non-bank lenders doubled.
We are likely seeing the start of a huge long run boom in mortgage debt outside of the heavily regulated banks and there are important ramifications from this.
One of them is that there is even more competition for ‘bankable’ clients who would have normally gone to a big bank and who now can get very compelling rates and service from the non-banks.
Two very prominent non-bank residential lenders are Pepper Money and Bluestone. Both of them are currently offering variable rates below 3.12% and fixed below 3% - that is in line, or better than the advertised rate from second tier and major banks.
This is astonishing to see and for people who want to explore alternative options from banks Skyward Financial works with them and can compare their offering to banks for you.
It is worth remembering the essential difference between a ‘bank’ and a ‘non-bank’ is that only banks a can hold deposits and because of that they are regulated by APRA and have strict governmental controls over them. While non-banks raise money from capital markets, hedge funds and investors and are not regulated by APRA but are required to operate under responsible NCCP lending rules.
Also, there are terms used in the home loan space of prime, near prime and non-conforming, or terms along those lines.
They basically mean that prime borrowers are people with large deposits and or incomes, the kind of people who pay back banks easily and have a low risk. Near prime might include self-employed people or if they are mixing business and personal debt or have a few negative credit marks. While non-conforming is for people with poor credit history and don’t usually have many options.
Traditionally non-banks were seen to be for people who couldn’t get a loan anywhere else, or a lender of last resorts. In some respects, this view is valid, but increasingly it is changing as they provide competitive rates, products and service.
The products non-banks offered were commonly referred to as ‘near prime’ products. Meaning they were for people who were not ideal (prime) clients for banks, but now they are offering prime products, and rates.
If you can recall the global financial crisis from 2008 in the US, this was also referred to as a “sub-prime” crisis.
‘Sub-Prime’ is the Yanky term for our Ozzie ‘Near Prime’ term.
See the potential issue here?
The potential boom in non-bank debt could lead to a GFC style “sub-prime” crisis or recession in Australia.
It is too early to tell if this growth in the non-bank space will mutate into an Australian version of a sub-prime crisis, but you can bet that we are going to see this space continue to grow rapidly.
The key takeaway here is this – for more people now there are a lot of options outside not only the big banks, but banks in general.
Banking on digital
Further to the developments in the non-bank space we continue to see the rise of the neo bank.
They are still banks, and are regulated exactly the same way the big four banks are, the key difference there is that they have no physical stores and all banking is done via a mobile app.
But in a similar way to there no being more options available for “prime” borrowers with non-banks there are now options for them at “neo-banks”.
This year the Australian government has granted new banking licenses for 4 new banks. They are called 86400, Volt Bank, Xinja and Judo Bank.
Skyward Financial is one of the first brokers in the country to currently be offering home loans through one of these new banks which we are very excited about.
These new banks have been built from the ground up on modern technological infrastructure in the cloud and are positioned to provide cheap rates and give you a complete bank on your phone.
We have talked before about how the big banks are being attacked from all sides, and the combination of non-banks and the new neo banks are the main competitors.