- Posted By Prince Lakshman
Borrowers are now avoiding the big four banks in 2019 to switch over to small lenders that offer more competitive rates, according to new data from an online mortgage broker.
The number of borrowers choosing to transact with the big banks has declined in the past six months.
Only 24 per cent of borrowers using the online-broking platform, Lendi, opted to go with the big four between January and June, down from 30 per cent in 2018.
The reason might be attributed to the fact that, over the same period, the big four charged more interest than other lenders while rates fell across the board. Nevertheless, the big four knocked down their rates by half as much as the rest of the 37 lenders on the platform.
There was a sharp drop of 17 basis points for the median rate for all lenders on the platform – from 3.81 per cent in January to 3.64 in June.
The big four dropped rates by only eight basis points and even increased rates during February, the month the banking royal commission’s final report was released.
The median rate charged by the big four in June was 3.79 per cent, 22 basis points higher than the median rate charged by the rest of the lenders. This was the biggest gap between the big four and other lenders over the six-month period.
According the Lendi managing director David Hyman, there are other reasons, aside from better rates, that are pushing customers towards less established lenders.
“The royal commission shattered trust in the big institutions,” he said. “Now, we are seeing more borrowers opting to go with less established or newer brands because savings are winning out over brand loyalty.”
“More digital lenders are entering the market and offering highly competitive loan packages.”
The big four’s declining market share could be explained by internal reviews in the wake of the royal commission, according to ANZ senior economist Felicity Emmett.
“It was the banks that really came under quite a lot of criticism in the royal commission, and so it’s the banks that have really responded to that criticism by looking very carefully at their responsible lending obligations and how they assess mortgage serviceability,” she said.
“It’s understandable we have seen perhaps a change in the relative growth in the banks and non-bank lenders.”
There’s a growth of 15 per cent annually in the non-bank lending sector, with growth speeding up in time with the weakening housing market according to the Financial Stability Review of the Reserve Bank.
Non-bank lenders aren’t authorised deposit-taking institutions (ADIs) and, therefore, fall outside the supervision of the Australian Prudential Regulation Authority (APRA).
Loans are generally funded by residential mortgage-backed securities (RMBS) or private investors rather than deposits.
The sector now accounts for about 5 per cent of outstanding housing credit, according to the RBA.
The RBA cited greater speed and the increased likelihood of approval as two key factors behind the rise in non-bank lending.
Investors are a key market, representing more than a third of non-bank lenders’ loans as banks back away from the segment.
Since APRA removed its 7 per cent serviceability floor, buyers have now more borrowing power.
Borrowers now only need to prove they can meet repayments at rates 2.5 per cent higher than those offered by the bank.
“What this means is that many home loan borrowers now have access to more credit or bigger loans,” Hyman said.
“The list of lenders that have changed their lending policy in response to APRA’s changes to guidance on serviceability assessments is growing by the day.”