Banks
Australian banks, regulated by the Reserve Bank, still hold the lion’s share of the lending market, writing over 90 percent of all owner - occupier home loans. Banks are the original lending institutions and for the most part they source their funds through client’s term deposits and savings deposits via their branch networks.
Clients are paid interest on deposited funds and these funds are then available to lend to borrowers. In turn, these borrowers pay interest to the bank on the sum lent. The margin between interest paid on deposits and interest received from loans provides banks with their major source of revenue.
When you borrow from a bank, your mortgage remains the property of that bank until you have completely repaid the loan. This doesn’t mean your house, as security for the loan, also belongs to the bank, but simply that you must repay your debt.
Banks’ Strengths
Because of their deposit facilities, banks are able to offer completely integrated banking packages. They are able to provide clients with savings accounts, transaction accounts and term deposits as well as various lending and financial services products. This affords clients the convenience of being able to conduct all their banking activities through the one institution. After a long period of domination of the home loan market, banks have been forced to respond to the aggressive moves made by the many mortgage managers like Dream Street who have entered the field.
Many banks have capitalised on this ability to provide clients with a wide range of services and several now offer what they refer to as ‘relationship packages’. These relationship packages offer various discounts as incentives to clients to use several of the banks’ facilities.
Due to their deposit facilities, banks are able to offer attractive loan features such as offset accounts, where a savings account is run in conjunction with the loan account and interest earned is offset against interest payable. Banks are currently the only institutions allowed to issue credit cards. Other companies such as Holden, Telstra, Dream Street and RAMS Home Loans have issued credit cards co-branded by banks as required.
Banks’ Downfalls
Banks generally have a large network of branches supported by many staff members involved in the day to day operation of taking deposits and lending funds. Much of the banks’ profits are swallowed up in the maintenance of their branch structures, whereas various other types of lenders don’t have such hefty overheads. Banks have long suffered from the perception that they are big, daunting corporations which are complex and impersonal. Via various marketing campaigns they are desperately trying to reverse this image as the area of client service becomes increasingly important. Unfortunately for the banks, some consumers still view them in a negative light.
This seemed to be exacerbated by the fact that after the May rate cuts of 2009, several of Australia’s largest banks failed to pass on the full 0.5 percent cut, choosing instead to drop their standard variable rates by a uniform 0.35 percent. Not only was this unfavourably represented in the media, it also led to investigations of collusion by the Australian Competition and Consumer Commission.
Mortgage managers are lending specialists who arrange funding for home and investment loans. Unlike banks, building societies and credit unions, mortgage managers do not have a base of client deposits with which to fund their loans. Instead they source their funds via a process known as securitisation. This is a process whereby assets (such as mortgages) with an income stream are pooled and converted into saleable securities. These assets are purchased and packaged into low risk negotiable securities such as bonds and then issued to investors.
The mortgage manager’s job is to set up the loan and perform a liaison role with all parties involved, namely originators, trustees, credit assessors and, of course, borrowers. They provide the client service role and are there to prudently manage the loan throughout its term.
Unlike banks, when you borrow money from a mortgage manager it’s not actually the mortgage manager who is the owner of the mortgage. As the name suggests, they are the party instructed to manage the mortgage. Instead the original provider of the funds is the ultimate owner and this could be any entity from a superannuation fund or unit trust to an individual who has invested in mortgage backed securities. Generally a trustee is appointed to act on behalf of the fund.
Growth of mortgage managers
One big reason behind the takeoff of mortgage managers was the introduction of compulsory superannuation in the 90’s. Investment fund managers controlling these funds were quick to realise that mortgage backed securities were a safe and lucrative investment. Suddenly mortgage managers had access to large pools of funds and many willing investors.
The big influx of mortgage managers into the market place has substantially heightened competition. Mortgage managers are price competitive for a number of reasons. They have substantially lower overheads than the banks. Most have comparatively few staff and no extensive branch networks or shopfronts to support as they don’t have deposit facilities. Rather than having several offices in each state, they may simply appoint agents who don’t require large offices from which to conduct their business and many focus instead on the use of phone centres or mobile lending.
Obtaining funding via the securitisation process and low overheads often allows mortgage managers to undercut the banks’ rates. Their initial loans, however, were traditionally ‘no frills’ products and their discounted rates often came at the expense of many of the loan features offered by the banks. Facilities such as offset and redraw were rarely offered by mortgage managers when they first entered the marketplace.
In more recent times, increasing numbers of mortgage managers are offering comprehensive products with numerous features which increase the flexibility of the loan. This is in response to the banks’ offering competitive discount rate home loans and attractive banking packages. As home loan rates available from the various types of institutions converge, the features on offer become more standardised. The majority of variable loans these days come with a redraw facility, so much so that it’s almost standard issue.
Mortgage managers currently account for over 10 percent of the home loan market. Not only are they rate competitive, they place an important emphasis on client service. It was a mortgage manager who first offered no obligation home visits 7 days a week and it was also the first to offer investment loans at the same rates as home loans. It endeavoured to avoid the feeling of bureaucracy many people associate with banks.
Specialising in mortgages has both negative and positive implications for mortgage managers. As they have no deposit facilities they are unable to offer the full spectrum of banking activities and facilities on their loans, however, not having to support such deposit facilities is instrumental in keeping operating costs to a minimum.
How safe are mortgage managers?
In the unlikely event that a mortgage manager should go bankrupt, there is no need to worry about the security of the loan. With loans originating from securitised funds, your mortgage contract is actually with the trustee acting on behalf of the investing fund rather than with the mortgage manager. Should the mortgage manager go out of business, the trustee will simply appoint another mortgage manager to look after the administration of the loan.
Mortgage Originators
There is a marked difference between mortgage managers and mortgage originators. Originators initiate or generate mortgage applications for the mortgage trust. Put simply, they ‘pool’ a group of mortgages which can then be sold on to investors as an income producing asset. Originators are responsible for receiving applications for finance, assessing credit and monitoring the transaction through to settlement. They may then appoint a mortgage manager or may take on the management role themselves.
Not to be confused with mortgage managers, mortgage brokers are responsible for introducing borrowers to lenders. Mortgage brokers offer prospective borrowers information on various lending institutions and their products. With the various types of lending institutions available, not to mention the vast array of products on offer, the borrower really is spoilt for choice these days. The task of the mortgage broker is to determine the most suitable loan for the borrower.
While the broking service is often free the broker will generally receive commission from the lender they recommend. Most mortgage brokers have financial arrangements with chosen lenders who will either pay them commission when they introduce a new client or pay a monthly subscription fee. Various non-lending institutions have moved into the lucrative mortgage market in a broking capacity, including a number of real estate agents. Ray White operates on behalf of some of the major banks including Westpac and Advance Bank while Century 21 deals primarily in St George Bank’s products.
Aggregators
Although most people would not have heard of aggregators in Australian lending and would not have used their services directly, they remain an important part of the financial landscape. In most cases banks and other lending instituitions rarely want to deal directly with individual mortgage brokers. That is where aggregators come in. They are an intermediary service between the banks and the mortgage brokers.
Credit unions
A credit union is a cooperative that is owned and controlled by the people who use its services. Each member is both a client and a shareholder in the credit union. Deposits from members are used to fund loans to other members, with the credit union business structure facilitating the process. Credit unions serve people who share a mutual interest, such as where they work, live, or go to church. Credit unions are non profit organisations, and because there are no external shareholders there is no pressure to earn profits at the expense of clients.
There is generally a credit union joining fee of between $2 and $10. This is equivalent to purchasing a share in the institution and entitles the member to a say in the running of the company, although the elected board of directors oversees the running of the institution and ensures the best possible management. Like banks, they offer a wide variety of banking facilities such as loans, deposits and financial planning. Credit unions’ main function is to serve members needs rather than make a profit. They therefore put a great deal of emphasis on client service and meeting the needs of members.
Building Societies
Both building societies and credit unions are regulated by the Australian Financial Institutions Commission. Building societies operate in the same manner as banks and obtain their funding primarily through client deposits. As with credit unions, clients are ‘members’. In a sense they own the society, which is why they are often referred to as mutual societies. Although building societies’ main business is home loans, they currently account for less than 4 percent of owner occupied lending, a figure which is declining.
Other lender types
There are various independent lenders who don’t fit neatly into any of the previously mentioned categories. Some lenders are aimed at niche markets and may have membership criteria. Super Home Loans, for example, is available to anyone who is a member of one of over 80 participating superannuation schemes. At the moment, Super Home Loans claims that its products are accessible to around 4 million Australians
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Ask your Mortgage Broker who is he really dealing with, chances are he might be working for a company owned by one of the major banks.
Find out more about who owns who in our "Who's Behind Who?" Blog. Click Here for more...
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