Lenders

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Pepper Money, ranked as Australia’s largest non-bank lender, has partnered with the Hawks Basketball Club for the National Basketball League (NBL) season.

The non-bank lender has agreed to become the Wollongong-based team’s principal sponsor for this year’s competition.

Pepper Money was drawn to the NBL club because the team’s “ambitions both within the league and the community” were aligned with the company’s corporate mission, which is “to help people succeed.”

Mario Rehayem, Australia and New Zealand chief executive officer at Pepper Money, said he wanted to join The Hawks’ family to help them rebuild their franchise, reclaim success in the league, and serve the community in the Illawarra region. 

“This also ensures our brand is seen by a wider audience of sporting fans in Illawarra and across Australia.”

Dorry Kordahi, president and co-owner of The Hawks, welcomed the partnership.

The terms of the sponsorship were not disclosed.

Last year Pepper Money re-signed with the AFL Saints, recommitting as co-principal partner of the club for 2021. 

St Kilda CEO Matt Finnis noted they had been part of their sponsorship supporters since 2015.

This time last year Pepper Australia’s $1 billion ASX-listing plan was mooted, with the group said to be targeting 2020 profits of about $83 million.

It has recently been reported by The Australian that Macquarie Capital was believed to be lined up for a role working on a potential float of the lender in 2021.
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The non-bank lender has agreed to become the Wollongong-based team’s principal sponsor for this year’s competition.

jchancellor

Australia's largest non-bank lender Pepper Money partners with the NBL's Hawks Basketball Club.

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More than a dozen lenders are offering cash incentives for home owners willing to move their business to a new lender, with Suncorp Bank, Reduce Home Loans and 86 400 the latest, according to RateCity.
Suncorp Bank is now offering up to $3,000 to refinancers, plus an additional $1,000 for people working in essential services roles, such as doctors, nurses, teachers and police officers.
A total of 13 banks currently have cashbacks on offer, including three of the big four banks – CBA, Westpac and ANZ.
<img src="https://www.urban.com.au/images/2020/5/21/RATECITY%201.JPG" alt="">
RateCity.com.au crunched the numbers based on someone refinancing their loan with $400,000 remaining to see whether they would be ahead or behind after picking a cashback special over one of the lowest rates in the market. 
<img src="https://www.urban.com.au/images/2020/5/21/RATECITY%202.JPG" alt="">
Sally Tindall, research director at RateCity.com.au, said while low rate loans were usually more cost effective, the tide was turning as the bigger banks chase after new customers more aggressively.
“Cashback specials are nothing new. They’ve been used for years as a clever marketing tool to grab people’s attention. What’s changed is the banks are starting to offer cashback on loans that also have competitive rates,” she said.
“Someone who refinances every couple of years to a competitively priced loan could potentially come out on top by taking up a cashback special."
“However, over the long term it’s a completely different story. A low rate is almost certainly going to trump a one-off perk over 10 or 20 years – often by tens of thousands of dollars."
“While the promise of cold hard cash is hugely attractive for anyone juggling the bills, people who put the money back into their mortgage will see even bigger savings as it will reduce their interest charges every single day," she concluded.
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j.ballantyne1990-6AQqhLzZaK

Three of the Big Four banks now offering home loan cash backs

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As at 31 March 2015, the total of residential term loans to households held by all authorised lenders was $1.30 trillion, according to the latex March quarter 2015 APRA figures.
This is an increase of $23.9 billion (1.9%) on 31 December 2014 and an increase of $107.1 billion (9%) on 31 March 2014. 
 Owner-occupied loans accounted for 65.4% of residential term loans to households.
Owner- occupied loans were $852 billion, an increase of $12.7 billion (1.5% on 31 December 2014) and  $57.3 billion (7.2% on 31 March 2014). 
Investment loans accounted for 34.6% of residential term loans. Investment loans were $450.2 billion, an increase of $11.2 billion (2.6%) on 31 December 2014 and $49.8 billion (12.4%) on 31 March 2014. 
<img src="/images/2015/05/26/apra1.jpg" alt="">
The latest lending data suggests lenders are generally meeting the 10% growth restraint sought by APRA, though some still to sufficiently rein in the pace of investor loans.
It has been suggested more than 82% of investor lending remains within APRA’s macro prudential growth target (not materially above 10%).
While a number of lenders are comfortably below this range (around 12% of market share) and have scope to increase their exposure to housing investors, some lenders are tracking well above APRA’s macro prudential target growth range. 
The 10 per cent benchmark is not a hard limit, but is a key risk indicator for supervisors in the current environment. 
The benchmark has been established after advice from members of the Council of Financial Regulators, taking into account a range of factors including income growth and recent market trends.
ADIs with greater than $1 billion of residential term loans held 98.4% of all residential term loans as at 31 March 2015. These ADIs reported 5.3 million loans totalling $1.28 trillion.
Of these loans: the average loan size was approximately $243,000, compared to $235,000 as at 31 March 2014; $479.1 billion (37.4%) were interest-only loans; and $30.1 billion (2.3%) were low-documentation loans.
New housing loan approvals with ADIs with greater than $1 billion of residential term loans saw approval of $82.3 billion of new loans in the quarter ending 31 March 2015. This is a decrease of $10.9 billion (11.7%) on the quarter ending 31 December 2014 and an increase of $8.5 billion (11.5% on the quarter ending 31 March 2014.
Of the new loan approvals $51.9 billion (63.0%) were for owner-occupied loans, a decrease of $6.5 billion (11.2%) from the quarter ending 31 December 2014; $30.4 billion (37.0%) were for investment loans, a decrease of $4.4 billion (12.6% from the quarter ending 31 December 2014; $34.8 billion (42.3%) were interest-only loans; $9.1 billion (11.1% had a loan-to-valuation ratio greater than or equal to 90%; and $0.6 billion (0.7%) were low-documentation loans. 
 
<img src="/images/2015/05/26/apra2.jpg" alt="">
 
It was December 9 last year when tthe Australian Prudential Regulation Authority (APRA) wrote to authorised deposit-taking institutions (ADIs) outlining further steps it plans to take to reinforce sound residential mortgage lending practices. 
These steps have been developed following discussions with other members of the Council of Financial Regulators.
In the context of historically low interest rates, high levels of household debt, strong competition in the housing market and accelerating credit growth, APRA has indicated it will be further increasing the level of supervisory oversight on mortgage lending in the period ahead.
Las December APRA advised it did not propose to introduce across-the-board increases in capital requirements, or caps on particular types of loans, to address current risks in the housing sector.
However, APRA flagged to ADIs that it will be paying particular attention to specific areas of prudential concern.
These included:
<ul>
<li>higher risk mortgage lending — for example, high loan-to-income loans, high loan-to-valuation (LVR) loans, interest-only loans to owner occupiers, and loans with very long terms;</li>
<li>strong growth in lending to property investors — portfolio growth materially above a threshold of 10 per cent will be an important risk indicator for APRA supervisors in considering the need for further action;</li>
<li>loan affordability tests for new borrowers — in APRA’s view, these should incorporate an interest rate buffer of at least 2 per cent above the loan product rate, and a floor lending rate of at least 7 per cent, when assessing borrowers’ ability to service their loans. Good practice would be to maintain a buffer and floor rate comfortably above these levels.</li>
</ul>
In the first quarter of 2015, APRA supervisors indicated they would be reviewing ADIs’ lending practices and, where an ADI is not maintaining a prudent approach, may institute further supervisory action.
This could include increases in the level of capital that those individual ADIs are required to hold.
APRA Chairman Wayne Byres noted that while in many cases ADIs already operate in line with these expectations, the steps announced last December would "help guard" against a relaxation of lending standards and, where relevant, prompt some ADIs to adopt a more prudent approach in the current environment.
‘This is a measured and targeted response to emerging pressures in the housing market. These steps represent a dialling up in the intensity of APRA’s supervision, proportionate to the current level of risk and targeted at specific higher risk lending practices in individual ADIs’ he said.
‘There are other steps open to APRA, should risks intensify or lending standards weaken and, in conjunction with other members of the Council of Financial Regulators, we will continue to keep these under active review.’
The steps announced today build on the enhanced monitoring and supervisory oversight of residential mortgage lending risks that APRA has put in place over the past year, which has included a major stress test of the banking industry, targeted reviews of ADIs’ residential mortgage lending and the release of detailed guidance to ADIs on sound residential mortgage lending practices.
APRA’s heightened supervisory focus on lending standards is being conducted in conjunction with the review of interest-only lending announced by the Australian Securities and Investments Commission (ASIC).
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jchancellor-FAypfDUnLy

Property investor lending running at 12.4% annual growth: APRA

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Finder.com.au have suggested that banks will make $21 million of extra profit in the coming weeks as they delay passing on on the rate cut.
All four major lenders, as well as a further nine have announced interest rate reductions to their standard variable home loan rates after the Reserve Bank cut two days ago.
Westpac has announced they will pass on the full Reserve Bank cut of 0.25 percent, but only from May 23, which will earn them at least $8 million in the next fortnight.
NAB are too to pass, however they will do it a week earlier than Westpac on May 16 which will pocket them $3 million in repayments.
Commonwealth Bank will cut but not until May 20, earning them an extra $7.7 million.
The quickest change will be at ANZ whose change will start from May 13, however they aren't passing on the full 0.25 percent, therefore will take an extra $2 million in payments.
 
Combined, the big four are set to earn roughly $1.25 million each day they withhold their rate cuts from consumers.
 
<img class="CToWUd a6T" src="https://ci4.googleusercontent.com/proxy/TWXiuAwQbJzW9Rkw0q14B81phNifpSYBzJnNGZt8NNyV2NXGOd4vB_IgCDDNBIwwaMKGN6uNxh2GEkZKImCTo_XJlNfqgXIpSQ3pXwrs-1cVF_XWGjJcyEVWXTICpo6JWPmtbEAMr7mKor7YjGtZLSSIC1IE4JHRuZDVCBA=s0-d-e1-ft#https://gallery.mailchimp.com/cc5e9bce699fa1d71a67cf499/images/33560dd0-d063-491c-be2a-dc3976e48925.png" alt="" width="480" align="center">
Money expert at finder.com.au Bessie Hassan suggests more than 750,000 home loan customers with the big four banks will miss out on $26 on average until they pass the cute.
“The longer a bank holds on passing on a rate cut, the more money they'll squeeze from Aussie pockets before finally adjusting their rates. So it's no surprise we're seeing them taking more time to pass on discounts,” she says. “Interestingly, it’s often a different story when rates are heading north.” Ms Hassan warns borrowers to keep an eye on their home loan interest rates. “We urge customers to be checking if their lender has passed on the rate cut as some could be taking advantage of the situation.” Ms Hassan says it’s the responsibility of the borrower to keep track of movements and then try to negotiate a better deal with their lender.  “If you’re still not happy with what’s on offer, it’s time to start shopping around.”  
<img src="/images/2016/05/05/Screen%20Shot%202016-05-05%20at%208.32.16%20am.png" alt="" width="524" height="354">
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Banks set to pocket $21 million as they play rate cuts: Finder.com.au

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Non-bank lender Pepper Money has entered into a deal with an entity of global investment firm KKR that will see the latter acquire 100 percent of its shares worth $675.9 million.
In an ASX announcement, the lender laid out details of the acquisition.
The scheme will go to a shareholder vote and, if approved, will see Red Hot Australia Bidco Pty Ltd – an entity owned by KKR – buy the shares. 
Shareholders will be given the option of rolling their shares over to Bidco or selling them at $3.60 per share.
The journey towards the takeover bid started in 2016 when Pepper’s stock prices were not where the firm wanted them to be, the Australian Broker reported, citing Pepper CEO Mike Culhane.
“The market thought that they were pretty cheap so we had a number of inbound enquiries from private equity firms, Chinese corporates, etc. All manner of firms were interested in starting a conversation about taking a position or the sorts of transactions which could be done.”
At that stage, the board got involved, confidentiality agreements were written up, and information was shared about the company, he said.
“As we went through that process, it became clear that KKR was a potentially good partner for the business going forwards.”
Pepper’s name will not change nor will there be any staff changes, according to Culhane.
He said the board felt this was the best deal for its shareholders.
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jonathanchancellor-7SQnKwU6yx

Non-bank lender Pepper agrees to acquisition by KKR entity

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AFG's latest Mortgage Index results released today shows that major structural change in the Australian lending landscape is continuing. 
“Today’s results paint a very different picture from this time last year,” said AFG CEO <a href="https://www.afgonline.com.au/corporate/board-of-directors/david-bailey-ceo/">David Bailey</a>.
“Regulator-led tightening of investor lending has led to a further drop in investor volume and they are now sitting at an all time low of 29% of the market.
The shift in lender appetite from investors to upgraders is also evident in average loan size. “The national average home loan is now sitting at an all time high of $491,000,” said Mr Bailey. “This increase can be explained by the fact that people generally spend more for their primary place of residence than they do for an investment property.
The number of people looking to refinance has dropped to 25%, whilst those keen to upgrade their living situation is increasing with upgraders now representing 41% of the market. “This is also likely to be a reflection of the lack of lending options on the table for investors wanting to refinance, as lenders pull back from the investor market to meet regulator demands,” said Mr Bailey.
The major lenders’ share of the market is also down to a post-GFC low of 64.4% as borrowers continue to explore alternatives outside of the major bank owned brands.
Looking at loan type, fixed rates are now at 26.3% of all loans which confirms many Australians are anticipating that the next interest rate move will be up,” said Mr Bailey.
First home buyers are enjoying their third consecutive quarter in double digits since the beginning of 2014. “National market share for first home buyers has lifted to 13% across the last quarter, helped in part by new stamp duty concessions kicking in on July 1 for this segment of the market in Victoria and New South Wales.”
Victoria continues to set the pace with lodgement volumes in that state up 27% on the first quarter of last year whilst every other state has lost momentum to varying degrees. The strength of the Victorian home market is also evidenced in the average loan size for that state, which is 5% higher than it was at the same time last year.
<a class="image_link fancybox image" href="https://www.afgonline.com.au/wp-content/uploads/2017/10/mortgage-index-financial-year-2018-quarter-1.png"><img class="alignnone size-large wp-image-19646" src="https://www.afgonline.com.au/wp-content/uploads/2017/10/mortgage-index-financial-year-2018-quarter-1-1024x438.png" alt="" width="1024" height="438"></a>
“Overall, volumes are up on the previous two quarters, however, compared to the same time last year they are flat. This translates into the view that regulator-led changes are being felt everywhere except Victoria,” concluded Mr Bailey.
To download the full report <a href="https://www.afgonline.com.au/wp-content/uploads/2017/10/afg-mortgage-index-october-quarter-2017.pdf" target="_blank">click here.</a>
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Tightening of investor lending puts investor volume at all time low: AFG

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Melbourne-based La Trobe Financial, one of the largest non-bank lenders in the country, has struck a deal with Blackstone, a New York-based private equity company.
Blackstone has taken an 80% stake in the privately-owned firm for an undisclosed sum. 
Chief executive Greg O'Neill will retain 20% ownership and continue in his role at the 65 year old lending institution.
O'Neill said the opportunity for La Trobe to partner with Blackstone was the perfect fit for staff, customers and the business.
"The specialist credit space is experiencing a defining period of change and growth around the world right now and it is critical that we continue to build on our strong capital position, expand our networks and draw on global best practice," he said.
Australian Broker noted La Trobe Financial manages investment mandates in excess of A$13 billion, including a retail Credit Fund of almost $2 billion and over $1 billion of public RMBS bonds issued.
Currently La Trobe has over 200 staff with offices in Melbourne, Sydney, Shanghai and Hong Kong.
The AFR says Australia's $1.7 trillion mortgage market has become a hotspot for global private equity titans with more buyout funds tipped to follow Blackstone and KKR's recent forays into the shadow banking sector. 
The La Trobe deal follows the $675 million takeover of listed non-bank lender Pepper by KKR earlier this month.  
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Blackstone takes on La Trobe Financial in mortgage market buyout

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ASIC has accepted a court enforceable undertaking and fined timeshare lender Future Holiday Finance Pty Ltd (FHF) for responsible lending failures. FHF has paid a penalty of $135,000 in response to three infringement notices and will pay up to $3 million in compensation to consumers.
FHF provides finance for the purchase of memberships in ULTIQA Lifestyle, a points-based timeshare scheme.
ASIC found that FHF signed consumers up to loans when they attended ULTIQA Lifestyle timeshare sales seminars, without first assessing if customers could afford the loans or if the loans were right for them.
As a result, ASIC has issued three infringement notices to FHF for alleged breaches of its responsible lending obligations.
As well as failures with the timing of FHF’s loan assessments, ASIC had concerns about their quality. The court enforceable undertaking addresses FHF’s poor loan assessment practices which did not meet the standards required by law.
In addition, ASIC examined FHF’s loan document and identified a potentially unfair contract term. ASIC was concerned that the ‘entire agreement clause’ prevented verbal statements made by FHF from forming part of the contract. This clause is no longer included in the loan contract and FHF has agreed not to enforce this clause in any existing contract.
FHF will offer to review the loans of all customers who entered into contracts between 1 July 2012 and 30 August 2018. Refunds will be provided to customers where contracts were not suitable. This compensation program will be overseen by an independent expert who will also assess FHF's compliance with its responsible lending obligations and whether the company’s credit contract contains any unfair terms.
ASIC Deputy Chair Peter Kell said: "Timeshare finance operators must ensure that they comply with their responsible lending obligations.
"Consumers should always take the time to consider upfront and ongoing costs of timeshare, including finance, given they are a long-term commitment and can be difficult to sell."
ASIC encourages customers who took out a loan to purchase their ULTIQA Lifestyle timeshare membership to ask for their loan to be reassessed. Customers can contact FHF on (07) 5556 3000. ASIC’s MoneySmart also has information about FHF’s remediation program.
ASIC can issue an infringement notice where it has reasonable grounds to believe a person has contravened certain consumer credit protection laws. The payment of an infringement notice is not an admission of a contravention of the National Consumer Credit Protection Act 2009 (Cth). 
ASIC is updating the regulatory framework for timesharing schemes. It is proposed that additional consumer protections apply, including to reflect the fact that it is common for a financier related to the timeshare operator to fund an acquisition of timeshare interests. ASIC’s website contains further detail of the proposed changes.
ASIC raised concerns with ULTIQA Lifestyle's disclosure and sales practices in 2016 after ASIC finalised a surveillance of ULTIQA Lifestyle Points Limited and ULTIQA Lifestyle Promotions Limited (ULTIQA Group), one of Australia's largest timeshare operators.
ASIC's scrutiny followed complaints received from consumers and other regulatory agencies alleging misleading and deceptive statements and unconscionable conduct by the ULTIQA Group. ASIC reviewed ULTIQA Group's disclosure and sales practices in relation to the sale of interests in ULTIQA Lifestyle, a points-based timeshare scheme with 11,792 members as at 30 June 2016.
ASIC made extensive enquiries of the ULTIQA Group regarding its disclosure and sales practices. In response to ASIC's enquiries, ULTIQA Group has:
<ol>
<li>amended its PDSs to give additional prominence to cooling-off rights, bonus weeks and split weeks;</li>
<li>amended point-of-sale documents to ensure applicants are aware of their cooling-off rights;</li>
<li>modified its monitoring and supervision of sales agents' compliance with and adherence to ULTIQA Group's sales processes and procedures;</li>
<li>removed and clarified potentially misleading statements from the members' kit given at point of sale, and agreed to monitor sales practices to ensure that certain features of Club membership benefits are not misrepresented; and</li>
<li>revised sales processes and practices by providing new members with temporary access to the 'members only' section of the Club's website during the cooling-off period to enable them to assess the benefit of the interests.</li>
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ULTIQA timeshare lender Future Holiday Finance pays ASIC penalty 

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The tightening in lending standards over the past year was not the cause of the recent decline in housing credit growth, the RBA has suggested.
Liaison with banks, other lenders and mortgage brokers suggests that the demand for housing loans has declined. 
"Liaison also reported that most people who apply for a housing loan can still obtain one, though they have to provide more documentation, answer more questions and wait a few days longer to be approved."
<img src="https://www.urban.com.au/images/2019/2/8/RBA%20Graph%2034.JPG" alt="">
The new landscape sees higher competition between lenders to issue new loans to low-risk borrowers, the RBA advised.
"Liaison with mortgage brokers and banks suggests that lenders are competing vigorously to attract borrowers with high-quality credit profiles that are applying for owner-occupier P&amp;I loans. "
"In particular, owner-occupiers with low loan-to-valuation ratios who can demonstrate the ability to service their loan are being offered quite low interest rates."
"Liaison also suggests that borrowers with these characteristics who have had a home loan for some time and want to refinance can often obtain a lower interest rate from another institution or convince their existing lender to lower the rate that they are paying." 
<img src="https://www.urban.com.au/images/2019/2/8/RBA%20Graph%201.JPG" alt="">
There has been a slowing in credit growth, primarily for investors, as the credit given by major banks to investors contracted, consistent with a decline in investor housing loan approvals by these banks.
The RBA noted, "However, this had been partly offset by a pick-up in investor credit growth at a number of other ADIs and non-ADIs."
"The slowing in credit growth is consistent with reduced demand for housing finance, particularly from investors."
"Indeed, liaison with major banks and mortgage brokers indicates that they have been receiving significantly fewer loan applications over the past year or more."
"Also, liaison with the banks and mortgage brokers indicates that most loans are still being approved; banks reported that the conversion rates of applications to approvals were stable at high levels in 2018."
The fall in housing prices in major markets appears to have reduced the demand for credit, particularly from investors, not the other way round as has been previously suggested.
<img src="https://www.urban.com.au/images/2019/2/8/RBA%20Graph%202.JPG" alt="">
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Tightening in lending standards not the cause of housing credit growth decline: RBA

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EXPERT OBSERVATION
This is an extract from the Reserve Bank of Australia's (RBA) Financial Stability Review.
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Over the past three years, there has been a shift in lending for property towards non-ADI lenders, also referred to as non-bank lenders.
Residential mortgage lending by non-banks is estimated to have been growing much faster than the rate of banks’ mortgage lending.
Non-bank lending to property developers has also grown at a fast pace.
They perform similar functions to banks and lend to a wide range of borrowers.
They finance their lending by securitising loans or with funding from private investors, such as high net worth individuals and institutional investors.
Non-bank lenders are prohibited from accepting deposits, and are therefore not prudentially regulated.
Non-bank lending supports economic growth by providing an alternative form of funding and increasing competition for lending. But the activities of non-bank lenders can pose risks to financial stability, as they have in some countries internationally.
These risks arise when non-banks exacerbate credit and asset price cycles, prompt banks to weaken their lending standards or have financial links with the banking sector that see credit losses at non-banks transmitted to banks.
This box assesses these risks today, in light of the recent pick-up in growth of non-bank property lending.
Non-bank residential mortgage lending is estimated to have grown by roughly 15% per annum over recent years, well above growth in lending by banks.
This has seen their market share of outstanding lending continue to trend up.
While these estimates are based on incomplete data that may be revised over the coming year, they are broadly consistent with the information available on non-banks’ liabilities.
Almost all non-bank mortgage lending is funded by issuing residential mortgage-backed securities (RMBS) and non-bank issuance of these securities has trebled over the past three years.
The flow of non-bank RMBS issuance in 2018 was close to the pre-crisis peak.
<img src="https://www.urban.com.au/images/2019/4/12/Non%20bank%20credit%201.JPG" alt="">
A factor that had supported non-banks’ increased market share has been banks’ repricing of certain types of housing loans.
Specifically, banks have increased the interest rates they charge on investor and interest-only (IO) loans, which are now on average around 50 basis points higher than interest rates on owner occupier principal and interest loans.
Banks increased interest rates on these products as a way of meeting the investor and IO lending benchmarks introduced by the Australian Prudential Regulation Authority (APRA) in 2014 and 2017.
Non-bank lenders, which were not required to meet APRA’s benchmarks, often do not apply this differential to investor and interest only loans.
These benchmarks have both been removed for most lenders. But other prudential standards are changing, as have perceptions of risk, so, to date, banks’ interest rate differentials based on type of loan remain.
Data from the RBA’s Securitisation Data set show that non-banks generally charge higher interest rates than banks for owner-occupier principal and interest loans; however, the interest rates they charge on other loans are typically much closer to those charged by banks (Graph D2).
As a result, investor loans have made up a growing proportion of nonbank lending, while their proportion of IO loans has fallen by much less than banks (Graph D3).
In contrast, banks have retreated from both these market segments.
<img src="https://www.urban.com.au/images/2019/4/12/Non%20bank%20credit%202.JPG" alt="">
In addition, a perception that finance is more difficult to obtain from the major banks has seen even some higher quality borrowers shifting to non-bank lenders.
The RBA’s liaison with nonbank lenders indicates that borrowers have been attracted by their faster approval times and the greater likelihood of approval compared with the major banks. 
<img src="https://www.urban.com.au/images/2019/4/12/Non%20bank%20credit%203.JPG" alt="">
… but remains small and financial stability risks are limited at this point
Non-bank mortgage lenders account for less than 5% of outstanding housing credit and so are not a substantial financial stability risk (Graph D1).
In particular, their small share reduces the risk that non-bank lenders will exacerbate the credit cycle. More generally, growth in non-bank lending has accelerated as housing markets and credit growth have both been weakening overall.
There is also no evidence of banks loosening lending standards to compete.
Banks have instead tightened lending standards since 2015, although there continues to be strong competition for the highest quality borrowers.
Non-bank lenders have also tightened their lending standards over recent years, even while writing a larger share of higher risk investor loans than previously.
This is because they are still subject to responsible lending laws, for which compliance expectations have increased over recent years, and because long-term investors often expect non-bank RMBS to broadly conform with APRA standards.
Consistent with this, arrears rates for non-bank lenders are slightly lower than for banks and have not increased materially to date.
Whether this would remain true if the unemployment rate was to rise remains to be seen.
The potential for contagion from non-banks to banks also remains small because interconnections between them are limited.
Banks have some exposure to non-bank mortgage lending through short-term ‘warehouse’ funding facilities, but these are small compared with banks’ own mortgage lending and their capital.
Banks’ willingness to increase these exposures significantly is limited by APRA monitoring the growth of these facilities, a liquidity requirement to match the undrawn exposures with highquality liquid assets, and the capital required to be held against such exposures.
The main constraints to a more rapid expansion of non-bank mortgage lending stem from their funding. RMBS pricing is well above the cost of bank funding (deposits or senior unsecured bank debt) and remains significantly higher than pre-crisis levels.
The cost of funding from RMBS markets has also risen significantly since early 2018, reflecting both a rise in spreads on RMBS and the increase in the bank bill swap rate, which forms the base for RMBS pricing.
This means that non-bank lenders will struggle to compete with banks for the highest quality owner-occupier principal and interest mortgages, unless they are able to secure alternative long-term funding.
In addition, it does not currently appear feasible to significantly increase the capacity of RMBS markets.
This is because the investor base for such instruments is relatively narrow and securing new investors has been a prolonged and challenging task.
Non-bank lending to property developers is also growing fast, and poses more risk
The pick-up in non-bank lending to property developers has occurred as banks pulled back from this market due to concerns about increased risks.
Non-bank lending for property development has come from a range of sources, but the most prominent providers have been managed funds that specialise in financing property development.
This lending is mostly funded by equity investments from wealthy individuals and institutional investors, including foreign funds.
This is an area where data are very limited; however, liaison contacts report that non-bank financing of property development is widely available and still growing strongly, especially in Melbourne.
Non-bank lenders generally require lower levels of pre-sales than banks and allow greater leverage for borrowers, but also charge much higher interest rates.
Presales became harder to achieve as the property market cooled, and this contributed to the demand for non-bank financing from developers.
If more marginal developments proceed, because developers are able to obtain funding from non-bank lenders, the boost to supply would place further downward pressure on property prices.
This could have flow-on implications for banks’ property portfolios. In particular, the performance of banks’ exposures to property developers would deteriorate if apartment sales and prices experience further significant declines and settlement failures rise.
However, much of the lending by non-banks is expensive mezzanine debt (debt which is ranked below senior debt in the capital structure).
This debt is relatively expensive and so reduces the likelihood that low-return projects will proceed, minimising the financial stability risk.
Further, this mezzanine lending is subject to some external oversight because when a bank provides the senior debt it has visibility of the mezzanine debt and the risks this may pose to the developer.
This oversight may diminish as non-bank involvement in senior debt is becoming more common.
The financial stability risks from non-bank property lending are judged to be limited at this point, although risks associated with property development bear watching.
Incomplete data on non-bank lending activity currently make it challenging to assess these risks.
However, legislation passed in March 2018 expanded APRA’s data collection powers to encompass a wider range of non-bank entities.
Since then, a working group, consisting of APRA, the Australian Bureau of Statistics and the RBA, has been working to improve the coverage of non-bank data.
This should help APRA and the RBA in their ongoing monitoring of financial stability risks arising from non-bank lending.
The Reserve Bank of Australia's Financial Stability Review provides the Bank's assessment of the current condition of the financial system and potential risks to financial stability. It contains a number of boxes on topics of special interest, along with occasional articles. The Review is issued half-yearly. 
Download the complete <a href="https://www.rba.gov.au/publications/fsr/2019/apr/pdf/financial-stability-review-2019-04.pdf" target="_blank" title="Link, opening in a new window, to PDF file.">Review here</a>.<abbr title="Megabytes"> </abbr>
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