Interest only buyers seeking shadow banks to outprice the majors

Interest only buyers seeking shadow banks to outprice the majors
Interest only buyers seeking shadow banks to outprice the majors

Shadow banks are charging interest-only investors nearly 60 basis points less for standard variable loans than the big bank competitors.

The big savings for property buyers explains their growing popularity, analysts have suggested.

Shadow bankers are however bracing for growth speed limits and pressures to constrain interest-only lending as faced by their major peers. 

John Khall, chief executive and founder of Pacific Mortgage Group, said it has not happened yet "but we expect some changes."

Their acceptance been facilitated by their prominence on online best-price comparator websites.

Moves by prudential regulators to increase regulation of the big banks has assisted in the shift to shadow banking finance. 

The shadow banks are non-authorised deposit taking institutions known as non-bank lenders.

Data suggests almost half their loan portfolios are interest-only borrowers, well above new regulatory standards intended to slow speculative lending. 

The big banks now need to keep interest-only loans to a 30 percent limit with their overall loan book. 

Shadow banks typically use securitisations to raise funding.

The are able to use low-cost distribution and lower regulatory capital requirements to out-price rivals.

Shadow banks on average out-price the majors on standard variable residential principal and interest by 60 basis points, standard variable investment principal and interest by 64 basis points, standard variable residential interest-only by 43 basis points and standard variable investment interest-only by 57 basis points.

The analysis published in Fairfax Media by Canstar, which monitors financial service products, is based on a $1 million loan with a loan-to-value ratio of 80 percent.

Using the ‘other financial intermediaries’ (OFIs) measure, the RBA said some time back that Australia's shadow banking sector is small relative to the global average, although they have surged after the APRA restrictions on investor lending. The RBA said earlier this year that it is watching the sector.



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