With the recent withdrawal of GE Money from the residential mortgage market in Australia, many people are asking how this will affect them. It also raises the question, “which lender do I give my business to?”
Of course the continual tightening of lending criteria has already limited your choice of lender, but if you have a good credit history and do not want to borrow more than 85 percent of the purchase price of your property, you do still have a choice.
Federal Government Deposit Guarantee
So what does the Federal Government’s guarantee on bank deposits mean for you? Are non-bank lenders safe? With the major banks now receiving over ninety percent of all loans should I follow the trend? If my lender pulls out of the market, like GE Money, what happens to my loan?
The Federal Government bank deposit guarantee has given everyone the impression that the major banks are the only lenders strong enough to survive these difficult times. This is certainly not the case, but the banks have benefited from this perception by achieving even greater market share.
Non-bank lenders (Aussie Mortgage Market, Wizard, Mortgage Choice and so on) get their money from wholesale funders, such as Challenger (ASX: CMM). They then put their own name to a home loan product and sell it to the market. This is how Wizard can sell a home loan called "Wizard Home Loan", by using wholesale funding.
Wholesale Funding For Mortgages
It is this very same wholesale funding that has been in the news so much lately. We have heard many reports of the increased cost of this funding, which means the interest rate that an Aussie or a Wizard can offer their clients has increased. This in turn has made them less competitive with the banks who have gained market share. A striking example of the consequences of this is the Commonwealth Bank purchasing one third of Aussie, and GE selling Wizard.
Non-Bank Lenders
Up until recently these non-bank lenders (most notably Aussie where it all started) could offer you a rate well below what the major banks were offering. This enabled them to attract business away from the banks, as well as providing you with a cheaper home loan. Now that this is no longer possible, the competition the banks are now facing has diminished significantly. Arguably this has enabled some of them to retain a proportion of the recent Reserve Bank interest rate cuts, instead of passing them on to the market in full.
If the non-banks were still offering a cheaper alternative, then the major banks would be passing on more of each rate reduction.
But is it safe to get a loan from a non-bank lender? You need to carefully check the exit costs for the loan you are considering. That is, if the non-bank lender closed its doors how easy would it be to refinance to another lender and how much would it cost you? Unfortunately when GE exited the market they left their clients with rates more than one percent above the industry average (Australian Broker Magazine). This led many to seek refinancing, only to discover that the exit costs were significant.
Are Banks A Safer Choice?
So does this mean a bank is a safer choice? Again, ask to be shown the exit costs for the loan as there is no guarantee as to which bank will have the best interest rate in the future. Gone is the time when all major banks had the same rate, and passed on the exact Reserve Bank increase or decrease. They now have far more flexibility to do as they please.
This leads us to a conundrum. Do you place your business with a non-bank lender in order to maintain competitive pressure on the major banks, or do you go with the banks because they have always been there and probably always will?
Most of you have decided to go with a major bank, as they now have around 92 percent of the residential mortgage market (The Financial Review Newspaper). However, if not enough of you decide on a non-bank lender all the great work John Symons did with Aussie may well disappear.
Finally, the best loan for you is the one that suits you best. A mortgage broker is an an excellent way to find out about all the different products available, and whether you decide on a bank or non-bank make sure it is your decision, and carefully consider all exit costs.
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