Borrowers increasingly depend on non-banks for home loans

Borrowers are increasingly turning to non-bank lenders for their home loan needs.

RBA’s March 2023 Bulletin explored the trends among non-bank lenders and found that mortgage lending has been driving their rapid growth since 2015.

In fact, mortgage lending among non-banks averaged 15% on a six-month annualised basis, more than twice the rate recorded by banks.

Despite this growth, however, the share of non-bank credit remains small at only a little under 5%, which is about half its share before the Global Financial Crisis in 2008.

Non-bank lenders offer higher rates

The interest rates on loans offered by non-banks are typically higher than those offered by banks.

Between 2019 and 2021, non-bank housing lending rates were about 60 bps above those offered by major banks.

The gap increased to around 100bps in 2022, which was consistent with a larger increase in funding costs for non-banks.

“Non-bank lending is riskier than bank lending on average, as a greater share of non-banks’ lending is to borrowers who are self-employed or employed in industries more sensitive to economic conditions, and who have low levels of documentation,” the RBA said.

Despite this, however, non-bank mortgages have performed well over recent years and loss rates have been at low levels.

Lending standards among non-banks

It appears that the lending standards among non-bank lenders did not weaken materially even with the rapid credit growth recorded between 2020 and mid-2022.

The share of new loans with high loan-to-value ratios (LVRs) has declined in non-banks, at a level below that of banks.

Non-banks also managed to proactively manage loan deferrals during the pandemic, preventing loan arears from rising.

However, one interesting finding is the increase in high loan-to-income lending for non-banks, compared to the decline for banks.

“The increase in high-LTI lending is consistent with the rise in housing prices over recent years; however, it might also reflect some shift of higher LTI borrowers to non-banks following the increase in APRA’s serviceability buffer in October 2021,” the RBA said.

However, the RBA said there is a need for ongoing vigilance by regulators and policymakers, especially given the rapid growth in housing lending by non-banks and the data limitations over the full scope of non-bank financing activity.

“Non-bank lending poses little systemic risk to financial stability in Australia at present,” the RBA said.

“However, the closure of data gaps relating to non-bank lending remains an important priority to ensure that the associated risks to financial stability are well understood.”

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Photo by @rattanakun on Canva.