Why borrowers are turning away from the big banks

Borrowers have turned away from the big four banks in 2019 in favour of small lenders with more competitive rates, according to new data from an online mortgage broker.

The proportion of borrowers opting to go with the big banks has plummeted in the past six months, an analysis of owner-occupied principal and interest loans by online-broking platform Lendi has revealed.

Only 24 per cent of borrowers using the platform went with one of the big four between January and June, down from 30 per cent in 2018.

Over the same period, the big four charged more interest than other lenders while rates fell across the board; the big four reduced rates by half as much as the rest of the 37 lenders on Lendi’s panel.

The median interest rate for all lenders on the platform was 3.64 per cent in June. This was down from a median of 3.81 per cent in January – a drop of 17 basis points.

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 gulf between the big four and other lenders over the six-month period.

‘Shattered trust’ driving exodus

It’s not just better rates coaxing customers towards less established lenders, according to Lendi managing director David Hyman. 

“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.”

The non-bank lending sector has grown by 15 per cent annually, with accelerating growth coinciding with a weakening housing market according to the Reserve Bank’s recent Financial Stability Review.

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.

Domain economist Trent Wiltshire said non-bank lenders still have to meet responsible lending laws, but being outside APRA’s reach could encourage growth.

“The fact that non-banks haven’t been subject to some of APRA’s new restrictions on lending is probably the big driver,” he said.

“Non-bank lenders can be more flexible, so people with unusual circumstances, such as self-employed or business owners, might be able to negotiate a loan.”

Chief executive of non-bank lender Pepper Money Mario Rehayem said the company had seen a “material increase” in customers choosing non-bank lenders.

“That comes down to personalised service and delivering faster decisions than a bank will,” he said.

Mortgage brokers – who account for almost 60 per cent of loan origination in Australia – played a part too, Rehayem said, because individual borrowers may not be aware of the wealth of options outside major household brands.

APRA changes ‘open the floodgates’

Earlier this month APRA scrapped its 7 per cent serviceability floor, a move that could boost buyers’ borrowing power by up to 20 per cent.

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.”

As of Tuesday, the big four and several smaller lenders – including Macquarie, Bank of Queensland and Bendigo and Adelaide Bank – had all changed their lending policies to reflect APRA’s new guidelines, with more expected to follow suit.

While non-bank lenders aren’t subject to APRA’s guidelines, Rehayem said the regulator’s moves still affected the sector.

“Long term investors often expect a non-bank to broadly confirm with APRAs standards,” he said. “A prudent non-bank will always keep a close eye on what APRAs intentions are.”

“We are looking at the intentions of what APRA is trying to achieve,” he said. “They are obviously trying to stimulate the market.

“What this is going to do is really open up the floodgates for borrowers’ borrowing capacity.”

“We haven’t decided which way we are going yet, but we are definitely looking into it.”

Domain Home Loans s a joint venture of Lendi and Domain Holdings.