Pepper Money weighs into funding cost debate

Wholesale debt market keeps competition alive, it says

Pepper Money weighs into funding cost debate

It’s no secret that funding costs are rising across the market, but, according to Pepper Money, the assumption that non-banks are at a disadvantage is a long bow to draw.

Regardless of how lenders source their funding, no-one is immune, the non-bank lender says.

Non-banks are funded by wholesale debt markets, in contrast to banks, which as authorised deposit taking institutions, receive funds from customers as savings, and lend it out at prescribed interest rates.

Because of the way they’re funded, non-banks are able to offer lending options outside of traditional bank offerings, and to broader segments of the market, Pepper Money says.

Pepper Money’s comments follow a response from Mortgage Ezy, another non-bank lender, in relation to a story published in the Australian Financial Review. The publication warns of a “big shakeup underway” for borrowers and savers chasing low interest rate loans, as lenders rethink strategies because of soaring funding costs. 

Financial chiefs expect some non-bank lenders further cede market share to the big banks as they “struggle to pass on higher funding costs to their customers,” the AFR says, while Anthony Baum, founder of Tic:Toc told the publication some non-bank lenders will “increasingly be challenged” by rising funding costs.

Read more: Are non-banks disadvantaged by escalating funding costs?

Pepper Money CEO Mario Rehayem told MPA the rise in funding costs was due to a widening in funding margins since the fourth quarter of 2021, a widening of the bank bill swap rate (a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities, notably floating rate bonds), and the three-year swap curve.

“It’s no secret that the entire market is experiencing a rise in funding costs, no lender – including  non-banks – are immune,” Rehayem said.

In today’s market, there is a real need for lending options outside of what traditional banks would offer, he said.

“Therefore, we don’t see it as a disadvantage to be funded thorough the wholesale debt market, in fact it is a very efficient funding model that gives non-banks the opportunity to keep competition alive,” Rehayem said.

Having raised $4.3bn in debt capital markets in the year-to-date, Rehayem said this meant Pepper Money is well-funded, in a strong position to continue to growth, and remains able to deliver on its mission to help people succeed.

“This week we completed our sixth securitisation for 2022, raising $1.25 billion,” Rehayem said.

Read next: Brokers celebrated in Pepper Money Shout Out campaign 

The Reserve Bank of Australia is tipped to make another official cash rate decision on Tuesday, with experts widely anticipating a fourth consecutive 50-basis point hike.

In the current environment of rapidly rising interest rates and increased focus on refinancing and interest rate deals, Rehayem said the non-bank’s ability to be nimble and tailor financial options to specific borrower requirements is an advantage.

It gives customers from all walks of life an opportunity to enter the housing market, or fund their next big purchase, such as a car or renovation, he said.

“Pepper Money has been around for over two decades and a record number of customers chose us because we get their real-life needs,” Rehayem said.

He said customers often come to Pepper Money for a purpose-led solution. Without non-banks, over 50% of all bank home loan applicants would have no alternative options in obtaining a home loan, he said.

“As brokers understand, the cheapest rate isn’t always the ‘right’ solution for every customer. Brokers play an integral role in recommending an option that helps their client succeed.”