New Lenders Take Large Market Slice
The Age
Monday February 20, 1995
Lisa Pickersgill looks at the non-bank lenders who by 2000 will cut the market share of banks in the $230 billion mortgage sector from 90 per cent to 60 per cent.
A SMART shopper buys during the sales. So it was last year in the mortgage market. Acquiring a home loan at cut-price interest rates (remember 6.95 per cent?) excited many borrowers who could not resist the tag-team display from a range of home lenders.
Despite today's higher rates, non-traditional lenders have now asserted their place in the market by continuing to undercut the major banks' variable rates.
The battle may never be won. Insurance companies, originators and trade unions are swinging from the major banks' stronghold of the home-lending market. Several banks have responded by introducing their own discounted variable rates, not to mention the concerted promotion of tempting loan add-ons, such as free overdraft facilities, travel vouchers and good old-fashioned help with moving into your new home.
Among the most substantial threats to the major banks over the past year have been mortgage originators. A mortgage originator is essentially a conduit for wholesale lenders and retail borrowers. For example, your superannuation fund may invest in the mortgages offered by an originator by purchasing units in a trust or bond available on the money market.
John Hobson, banking analyst at ANZ McCaughan, says the main reason for the success of mortgage originators has been a cheap source of funds, a low cost distribution network and the growth in superannuation funds which is facilitating an increased demand for securitised housing loans.
``Already mortgage originators have begun to erode banks' housing market share. However, the sharp rise in interest rates removes their competitive advantage," Hobson says. As ``non-banks are tied directly to the professional money market rates in the absence of the use of derivatives, their cost of funds increases in direct proportion to a rise in these rates; this is not the case with the banks".
Also, the introduction of bank transaction fees may ensure that banks can recoup costs, keep interest margins down and not be undercut on home loan rates, he says. But he says that ``even if banks lower their branch operating costs by 50-55 per cent, the operating cost advantage currently achieved by mortgage originators will not be eroded".
As the Cannex table shows, in December 1994, when most banks had already lifted variable interest rates to 10.5 per cent, a home borrower could have made a spectacular saving by borrowing from Aussie Home Loans (7.5 per cent) or BMC Mortgage Corporation (7.75 per cent).
As anticipated, several mortgage originators have now been forced to lift their rates. However, the average variable rate of the four major originators (9.25 per cent) still sits below the four major banks' average (11.58 per cent).
Vicki Edema, managing director of Austral Mortgage Corporation, says: ``Nobody believed the volume of business the originators would receive." Currently, the total outstanding housing debt in Australia is $139.5 billion. According to Hobson, originators claim about 5 per cent of new home lending.
But Edema says, ``If mortgage originators begin to diversify, something will come unstuck." Discounting interest rates is the primary way mortgage originators will continue to add value, she says.
Ron Howard, manager of business development at Vicwide Finance, a subsidiary of accounting firm Illingworth David, said: ``We, as a mortgage originator, cannot do what banks do; there are no additional perks along the way."
A certain type of borrower, however, disregards the perks and hooks into the lowest rate on offer. ``We don't actually see too many first- home buyers," says Edema. Ninety per cent of Austral's customers are looking to refinance loans, and are likely to be borrowing money for an investment property by using the equity in their first home.
In January, BMC Mortgage Corporation raised its variable rate to 9.5 per cent. Aussie Home Loans, however, still offers an 8.95 per cent variable interest rate.
John Carson, managing director of BMC Mortgage Corporation, says that for an originator to make a profit, a larger margin must be placed on top of ``teaser" rates.
But as one originator pointed out, the catch-22 for those originators who choose not to work at ``ridiculously low rates" while still undercutting major banks is that the phones do not ring as hot as they used to.
Chris Gosselin, managing director of Market Infofax, says it is likely that originators will always sit at least 1 per cent below major banks because they can exist on smaller margins.
Although the originator may not be suitable for those who want add- ons, they are suitable for the price-conscious borrower, he says.
A report released by Bain Securities Research, says: ``Provided non- bank lenders' appetite for mortgage assets is sustained, origination could grow to represent 25 per cent of new business within three years and possibly 50 per cent by the year 2000."
Based on Bains' projected $230 billion mortgage market in 2000, the market share of banks is forecast to drop from 90 per cent to 60 per cent should comparative market pricing remain the same.
© 1995 The Age