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I know a thing or two about non-bank lenders. After all, I send 100 per cent of my volumes through non-banks.
That's why I think it's important to educate my broker colleagues about some of the misconceptions that are floating out there in the third-party channel.
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Prior to the GFC, non-banks had a good reputation by offering a good alternative, but unfortunately there were a few bad eggs that did not reduce their rates at all during the GFC and eventually sold their loan book to exit the Australian mortgage market. This was compounded by the fact that the Australian government offered bank guarantees and the big four capitalised with their – as per usual – aggressive advertising.
At the time all non-banks pretty much borrowed funds from offshore, just like the big four, but during the GFC the cost of money shot up, so the non-banks had to pass on the cost or make a loss. Meanwhile, all of the savings deposits moved back to the big four as they promoted themselves as the safe option. This is when they borrowed 50 per cent from their deposits and 50 per cent offshore, essentially halving their cost of funds compared to non-bank lenders.
It took the big four three months to regain close to 95 per cent of the mortgage business, up from about 80 per cent, and when they hit those highs they increased their rates, essentially matching the non-bank lenders. They duped the mums and dads of Australia to come back to them during the crisis whilst reducing mortgage broker upfront commissions by about 25 per cent and trail commission by about 33 per cent, and while using the GFC as an excuse to lay off staff.
Since the GFC, non-banks have become smarter, more efficient and have strived to secure more reliable lines of funding. In many cases, they have been getting funds from the big four to repackage, which means brokers can get a cheaper interest rate and better commission than the banks pay. So recently we have seen a revitalised non-bank sector; the big four are getting nervous and so are starting to increase their commission to mortgage brokers. How condescending.
Another factor that we need to be mindful of is the power of the baby boomers. They are the largest population in the western world and trends have followed their desires. Traditionally, they got a job and stuck with it for life. They were loyal to their job and loyal to their bank, which they held in high regard because back in their day they had to apply for money as if they were appearing before a king. Thankfully, times are changing, although the baby boomers have left an impression on the next generation, so there is still this same loyalty to the bank.
Banks have also been smart by cross-selling product. Back in the 80s they realised that if a client had one bank product the probability that they would leave was as high as 75 per cent, but if they had two products that dropped below 50 per cent, and if they had three or more products that dropped even further. This is why when you walk into a bank branch they offer you products you didn't even know existed, combined with the fact the teller is on a commission and has monthly targets to meet to secure these bonuses and commissions.
So, in summary, the main misconception is that non-banks are not as safe as the big four. Consumers don't realise that the big four borrow money from offshore and repackage and sell into the market, which leads to my belief that non-banks should band together to tell the truth.
Nathan Daniell, managing director, Simplify Your Mortgage
Nathan Daniell is a residential investment and home loan specialist who founded Perth firm Simplify Your Mortgage in 2006. He exclusively uses non-bank lenders.
