Finance Market Update - 7 December 18
Big banks have pulled back in lending for property which has sent many borrowers into the “shadow” banking system, but despite the ominous sounding name non-bank lenders are good options for many people and they are offer competitive products and services. We discuss them in this fortnights update.
Lenders in the shadows
In many countries we refer to “shadow banking” as the segment of lenders in the part of the financial system comprised of unregulated non-bank and private lenders.
The term ‘shadow’ refers to their licensing, in that they are not regulated in the same way banks are, like CBA or Westpac, because they do not hold deposits, only lend money. They are not “Authorised Deposit-taking Institutions” like big banks.
In Australia, names you might know in this shadow system are Liberty Financial, Pepper Money, La Trobe Financial and Bluestone, among others.
Most shadow lenders use private or investors money to lend. This often means their interest rates are higher than banks, but for certain borrowers they are a very competitive option, because they are willing to write deals the big banks won’t, and they specialise in more “risky” deals.
For this reason we have and will continue to see these lenders grow market share and make owning a home more of a reality for many Australians that otherwise would have not got a loan from a big bank.
We talked about “second-tier” lenders back in July as we could see the increase in shifting borrow sentiment and appetite for their offering, and so far over 2018 market share of these types of lenders has been increasing steadily to reach approximately 9.5% total.
They have been picking up deals the banks don’t want and borrowers are much more willing to borrow from them. This is particularly true for investor and interest only loans. Where regulation from APRA has forced big banks to pull back in lending in that space, which has been a boon for non-bank lenders.
The bank declined my loan
This is happening more and more as banks tighten their lending, scrutinise living expenses and are worried about the royal commission and responsible lending laws.
These specialist lenders in the shadows are writing the deals the banks won’t.
Generally speaking, these non-bank lenders are not the most competitive offering for what are commonly labelled as “prime” borrowers and offer more suitable products for “near-prime” or “specialist” borrowers.
But who are borrowers under those labels?
For example: Prime borrowers could be 2 professional people on a salary income buying a property to live in. Near-Prime might be a similar situation but one of them is self-employed, and specialist might be when one of the borrowers has a black mark or default on their history.
The big banks like prime borrowers the best and don’t fight hard or really cater for the others.
These types of lenders are particularly strong for Near-Prime and Specialist borrowers, because they cater to them, particularly self-employed, and can offer solutions for people who don’t fit in the box the bank wants them too.
But while they might do the deals the banks won’t they come at a cost. Because they use private capital and are non-bank lenders, their rates can be a percent or two higher than bank interest rates. At Skyward Financial when we speak to clients about using these lenders it is important to have a “mortgage strategy” and ensure they are the right fit.
Property prices continue to slide
According to Core Logic, the leading property data provider in Australia, property prices in Sydney have dropped by 9.5% since the peak of the housing boom in October 2018.
This is a significant decline, but we view the practical implications of this “credit crunch” are slightly worse than this and in reality the drop is probably between 10% - 15%.
The reason we take this view is twofold.
First, you have to take the data with a grain of salt. In that they don’t get 100% completely accurate data from real estate agents and other sources, so while it is the best source of truth we have, it is still fallible.
Second, when we speak to real estate agents, investors and buyers’ agents the anecdotal evidence is pointing to a harsher market than those numbers indicate. It is a buyers’ market, and there are real instances of ‘negative-equity’ happening and people are being trapped in their mortgage.
As prices slide and more people want to get into the property market or upgrade, and as banks continue to tighten and reduce lending, the non-bank and specialist lenders will be there to support people. Though they do come at a cost, as banks generally offer lower rates.
Skyward Financial works across the spectrum of lenders including the big banks, non-bank and specialist lenders and can talk about all available options.