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.

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.

“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.”