Loan Market mortgage broker Bruce Patten noted how the shift from banks to non-banks, and back again, tends to move in waves as credit conditions change.
He attributed the recent popularity of non-banks to changes to the Credit Contract and Consumer Finance Act (CCCFA) and the tightening of loan-to-value ratio (LVR) restrictions.
While both banks and non-banks need to comply with the CCCFA (which is aimed at protecting borrowers from predatory lending), Patten said banks have tended to interpret the rules more conservatively than non-banks.
As for the Reserve Bank’s LVR rules, they only apply to banks.
So, investors in particular, who don’t have large enough deposits (i.e. of more than 40 per cent) to get finance from banks, have made use of non-banks.
Also, because the LVR rules only apply to banks’ new lending, Patten said borrowers had used non-bank lenders as a backdoor to securing finance with banks.
For example, someone with a small deposit might get their loan approved by a finance company in the first instance, and then refinance a couple of years later with a bank that would’ve declined them due to the size of their deposit.
Centrix Group managing director Keith McLaughlin and Knight Advice director Malcolm Knight also put the rise in prominence of non-bank lending down to the CCCFA and LVR restrictions.
However, Patten believed that as interest rates rise, and the differential between what banks and non-banks charge borrowers grows, non-bank lenders will start to look less attractive.
He said borrowers were happy to swallow higher interest charged by non-bank lenders when rates were rock bottom. But now that they’re rising, paying more interest for easier credit may be less appealing.
“Higher rates mean people are less likely to take risk,” Patten said.
He noted that following the Global Financial Crisis, when a number of finance companies failed, one of the major non-bank lenders, Bluestone, paused new lending to avoid increasing its exposure to risk.
