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Welcome to the finance update for the week ending 4 November, 2023.
A nervous week ahead with the RBA meeting again on Tuesday with many anticipating another increase to the cash rate.
Some interesting movement on the interest rate front this week in advance of that meeting, with NAB quietly increasing their base variable rate by 0.1% and ANZ, Macquarie and ING all increasing their 1 year fixed interest rates by 0.25%, 0.2% and 0.2% respectively. It’s difficult to know what to read into this.
In this week’s newsletter, we take a look at how the increasing number of non-banks fund their loan books.
Non-bank mortgage lenders in Australia employ various methods to fund their loan books. Some common sources of funding for these lenders include:
Wholesale Funding
Securitisation: Non-bank lenders often package and sell mortgage-backed securities to investors in the financial markets. This allows them to raise capital by essentially selling off a portion of their loan portfolio.
Warehouse Facilities: These lenders may utilise short-term warehouse facilities, which are lines of credit used to fund loans before they are securitised and sold in the secondary market.
Bank Facilities
Line of Credit: Non-bank lenders may secure lines of credit from traditional banks, providing them with a flexible source of funds to originate and maintain mortgage loans.
Institutional Investors
Pension Funds and Insurance Companies: Non-bank lenders may attract investment from institutional investors such as pension funds and insurance companies, providing a source of long-term capital.
Issuance of Bonds
Corporate Bonds: Non-bank lenders may issue corporate bonds to raise funds. These bonds represent debt that the lender agrees to repay over a specified period, typically with fixed interest payments.
Equity Capital
Private Equity: Non-bank lenders may raise funds through private equity investments, where investors inject capital into the company in exchange for an ownership stake.
Retained Earnings
Profit Reinvestment: Non-bank lenders may use retained earnings from previous operations to fund new loans. This method relies on the lender’s ability to generate profits and accumulate capital internally.
It’s important to note that the specific funding strategies can vary among non-bank mortgage lenders, and many institutions may use a combination of these methods to diversify their funding sources and manage risk.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
