There are other options than just banks

The Global Financial Crisis (GFC) had a number of major impacts on all our lives. A major one that affected anyone purchasing either a first property or a new home, as well as those looking to refinance their existing mortgages, was that significant competition was eliminated from the home loan segment. The cause for this was twofold.

Firstly there was a significant impact on our smaller banks and lending institutions. International credit markets dried up and these smaller institutions that had relied heavily on international credit markets to raise funds to be able to lend were no longer able to. This resulted in a raft of “take overs” by the major banks that had strong balance sheets and were able to weather the effects of the GFC (e.g. CBA acquired Bankwest and a significant interest in Aussie Home Loans, Westpac acquired St George Bank and the RAMS franchise and NAB buying Challenger’s home loan business).

Secondly the “Non Bank” sector, which had the habit of keeping the Big Banks honest, by offering very competitive interest rates and often superior service to customers were no longer able to secure new funding for customers.

One of the obvious problems of a market dominated by a few players is lack of competition and choice. And this can lead to more expensive home loans as the larger lenders are able to maintain or widen their lending margins. With more competition however, lenders tend to be more price sensitive meaning cheaper loans for borrowers.

Australian Bureau of Statistics figures show the banks wrote, in value terms, around 80% of all owner-occupier home loans before the GFC hit in September 2007. Since then there’s been a sustained increase in their market share whereby today the banks control a massive 90%+ of the home lending market.

Thankfully, whilst the impacts of the GFC haven’t completely gone away the Non Bank sector has recovered and is once again providing some much need competition to the banks.


Competition is returning

The smaller bank and non-bank lenders were the worst hit when capital markets contracted and funding costs soared. Their market shares fell away allowing the major banks to control an even larger slice of the home loans pie.

But it looks like market conditions are now starting to improve as far as access to cheaper funding is concerned. According to the RBA the cost of long-term and short-term wholesale funding has decreased since mid-2009 meaning non-bank lenders are in a better position to compete on price. For instance, if you check out the Best Buy tables shown on home loan comparison sites and in newspapers and magazines, you’ll often find the best lenders are not the banks, but rather the non-banks who not only offer cheaper rates, but also charge lower fees and provide a level of customer service comparable, and often better than their larger bank competitors.
They can and do compete on service quality and price (because of their lower overheads and cost structure) and often lead the way in product innovation.
You have a choice!

With our financial markets returning to normality, inflation under control and strong employment prospects the financial and economic outlook for Australia looks bright. This good news is tempered somewhat by the inevitable increase in home loan interest rates which will follow the expected movement in the RBA’s Cash Target Rate from 4.25% to around 5.00% by the end of the year.

This means that if you’re looking for your first home loan, or wanting to refinance an existing one, you should cast your net as wide as possible to get the best deal.

It’s therefore worth considering non-bank lenders, because they may be able to provide you with a better deal than you could get from the major banks - you won’t know unless you take a look at what they have to offer.

Top Choice Home Loans (www.topchoicehomeloans.com.au) provides a range of products and service options for customers looking for a better loan. Compare what you have been offered. Top Choice Home Loans has access to secure and very competitive interest rates provided by one of the world’s largest banks (ING).


June 2010