Why Investors Are Leaving The Big 4 In Droves

Article from API

Australians have always had a regrettable relationship with the Big 4 Banks. Rarely do I hear consumers raving about the 'amazing' experience they had at their local branch or how 'fairly' they've been treated when looking at recent fees and changes on their account!

However, the reality is around 80% of us bank with the Big 4 and as we've seen with the royal commission, they're essentially too big to fail.

But while the above holds true, the home lending landscape is a forever changing beast and through technology and competition, I don’t think this will always be the case longterm.

Specific to investors, there’s even a case this may evident right now. Recent data from Australian Finance Group’s (AFG) latest mortgage and competition index has shown that in the three months to 30 September, the share of investor lodgements to the Big 4 Banks slipped from 56.2 per cent to 50.2 per cent. When compared to the same quarter in 2018, the major banks’ investor share is down from 57.1 per cent.

So why is this the case?
Well, from what I’m seeing on the coalface, there are three reasons which may explain what’s happening in the market.

1. Non-major interest-only rates are fantastic

For the past four years after APRA made sweeping changes to the investor landscape, both investor and interest-only rates have been significantly higher than owner-occupied and principal and interest rates.

However, when APRA removed all their restrictions earlier in the year, the gap between principal and interest and interest-only repayments has been slowly reducing. I’m now once again having discussions with clients about how interest-only loans can play an important role in managing their cashflow.

Currently, many non-major banks only have a 0.1-0.3% difference between their interest-only and principal and interest rates.

The majors have been slow to move on this and their appetite towards interest-only loans, in general, is not as positive as it is with the non-majors.

 

2. Non-APRA bank niche policy now come with competitive rates

During the heavily APRA regulated lending market that we’ve just come through, there were a number of lenders, the likes of Liberty, La Trobe, Pepper Money and Bluestone who put their hand up saying they aren’t actually governed by APRA (this was news to me!).

Because of this, one of the significant advantages these guys have had is the fact that they do not apply a buffered interest rate for loans that someone may have with other institutions. This means they can take actual repayments. For some investors, this has meant their borrowing capacity is double what they could achieve through one of the Big 4.

The challenge with these guys, however, has been the fact that while they had very favourable policy, it came at a cost and their rates were just way too high for many investors to stomach.

Well the last few months have seen these non-APRA lenders reduce their AAA rates significantly and they’re now only slightly higher than what the majors are offering.

 

3. Continual changes in consumer confidence and behavior towards the Big 4

Personally, this is more of a long-term trend but prior to the mortgage broking industry creating competition in the lending space, the majors lived in a utopian world of being the only ticket in town for people who needed finance.

As time has passed, the old branch model is fast becoming extinct and with improvements in technology for internet banking, the reality is now there’s not a whole lot the Big 4 can offer that is different from all other lenders in the market.

If you add in how disastrous the royal commission was from a brand perspective for them as well, it all points towards more of a level playing field for all lenders.

 

Hmm, these are excellent points but I still weigh the significant risks of non bank lenders. When offset accounts are not covered by the bank guarantee and non bank lenders can not handle alternative purchasing structures, there will always be a role for the Big 4 to play. However, there is a market for the non bank lenders and if investors are able to benefit from them, all the power to them!