Lender director provides explanation
Non-bank popularity is continuing to rise in New Zealand given the current state of the market and ongoing interest rate rises, but they do operate quite differently from banks.
Non-banks provide home loan products and other loans but customers can’t deposit their money into an account like they can with banks.
Bluestone Home Loans managing director Peter Wood (pictured above) said the best way to differentiate between a non-bank and an institutional bank is non-banks borrow money from institutional banks, which is inherently why the interest rates they offer customers are higher than the banks’.
“A good analogy to describe a non-bank lender is like Lego building blocks. Think of us as like building a house out of Lego, which is how we piece together interest rates,” Wood said in a recent webinar.
“The first component is the official cash rate, which is closely linked to the BKBM [bank bill reference rates which are a benchmark that represents the mid-rates for prime bank eligible securities that are traded in the local New Zealand market], rather than the central bank which is used for monetary policy. The BKBM follows the RBNZ cash rate to a degree, but factors in quicker basis movements and markets.”
Wood said the BKBM was sitting at 3.05% and the official cash rate at 3%.
“The next stage of our ‘home’ is the BKBM – which we consider as the foundational slab,” he said. “The cost the consumer bears and the function is the way that some banks take into account the BKBM to and how it relates to a mortgage product.”
Wood said during the pandemic, New Zealanders were able to borrow money at rates from institutional banks between 2% to 3%, as opposed to Bluestone Home Loans which was sitting between 4% and 5%.
“Now for our roof which includes the cost of goods sold, the staffing costs to write loans, servicing costs to service loans, these all stack up once taken into account the costs you want to make, not including any profit,” he said. “This does not include maintaining business, long-term trail commissions and working towards business sustainability.”
Wood said the chimney on top of the house was the fixed and variable rates on offer.
“Our floating rates are now sitting in the sevens,” he said. “The OCR is up and continuing to climb, however the BKBM has been volatile which is part of the reason we withdrew fixed rates from the forward-looking market. On any given day, we can be out of money by 50 to 60bp depending on market shifts.”
Wood said non-bank lenders lock in their funding facilities by negotiating on a 12-month basis.
“We lock in a margin for a fixed period and costs we that facilitate from a cost/funds basis, which is now 60bp higher than 12 months ago,” he said.
“We need to ensure we are not out of money when business becomes unstable long term. These are the components we need to build up with our rates and push them out to the market, which is why we have a margin above the floating rate to bridge the gap and make sure our cashflow is predictable. If you take away the margin, then the rates we offer would be on par with the banks.”