The Who's Who of Australian lending

Banks, building societies, credit unions, mortgage managers and originators - there are so many choices of lender type in Australia that it’s often difficult to decide on the appropriate one. YMM looks at how they operate and examines who offers what.

by Georgia Bennett

Banks

Australian banks, regulated by the Reserve Bank, still hold the lion’s share of the lending market, writing over 80 percent of all owner - occupier home loans. Banks are the original lending institutions and for the most part they source their funds through customer’s term deposits and savings deposits via their branch networks.
Customers 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.

Bank's strengths

Because of their deposit facilities, banks are able to offer completely integrated banking packages. They are able to provide customers with savings accounts, transaction accounts and term deposits as well as various lending and financial services products. This affords customers 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 who have entered the field. Many banks have capitalised on this ability to provide customers 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 customers to use several of the banks’ facilities. Holders of a National Bank Home Loan Package, for example, will have their annual credit card fee waived along with their FlexiAccount transaction and account keeping fees. Westpac has a package whereby if you take out a Premium Option, combined or fixed home loan, along with a Westpac credit card and transaction account then you are eligible for a discount on home loan establishment fees, a discount of $50 on home and contents insurance, a free financial needs analysis, annual credit card fee waived for 1 year and the $5 monthly fee on their Classic Plus Account waived for the duration of the home loan.
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 and RAMS Home Loans have issued credit cards co-branded by banks as required.

Bank's 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 customer 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, 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

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 customer 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. For a complete explanation of the securitisation process, see the article on page 31.
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 customer service role and are there to prudently manage your 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 in the last five years 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 customer 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.
RAMS mortgage managers have made the commitment to making their contracts more user friendly and understandable. RAMS was also the first mortgage manager to offer a credit card which is co-branded by Colonial State Bank
During the May round of rate cuts, it was the major mortgage managers who were first to pass on the full cut. RAMS, AMP Priority One and FAI all dropped their standard variable rates by 0.5 percent, gaining them positive media exposure while the banks were bearing the brunt of unfavourable publicity over their failure to do the same.
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 or facilities such as offset accounts on their loans. However, not having to support such deposit facilities is instrumental in keeping operating costs to a minimum.
Although mortgage managers are not legally obliged to join, many are members of the Mortgage Industry Association of Australia. This body supervises members, which also include banks, building societies, credit unions, legal firms, mortgage insurers, trustees, mortgage brokers and fund managers. The MIAA imposes a strict code of ethics by which members must abide, including confidentiality requirements and dispute resolution procedures.

How safe are mortgage managers?

In the unlikely event that your chosen mortgage manager should go bankrupt, you need not worry about the security of your 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

While mortgage managers, RAMS for example, may also be mortgage originators, this is not necessarily the case and there is a marked difference between the two. 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.

Mortgage brokers

Not to be confused with mortgage managers, mortgage brokers are responsible for introducing borrowers to lenders - they act as an intermediary. Outfits such as Mortgage Choice, the largest independent home loan specialist, and The Mortgage Bureau 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, a small fee may be charged, and the broker will generally receive commission from the lender they recommend. However, be warned. Most mortgage brokers have financial arrangements with chosen lenders who will either pay them commission when they introduce a new customer or pay a monthly subscription fee. While you may be offered information on a spread of lenders, you may not get information on the very best product for you, so it may still pay to shop around yourself.
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.

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 customer 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 customers.
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 customer service and meeting the needs of members.
Collectively, credit unions have experienced 13 percent growth in the housing/real estate sector in the year to March 1997. This is a favourable statistic considering the growth of the home loan market overall for the same period was around 8 percent.
The Credit Union Services Corporation of Australia (CUSCAL) is the major service provider for credit unions and offers its members management services, transaction services and various banking products as well as public affairs support.
The Wallis Report proposed that certain laws which currently favour banks and hinder competition in the mortgage market be abolished. In light of any reforms, it will be interesting to see how credit unions fare.

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 customer deposits. As with credit unions, customers 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.
Not to be confused with building societies, friendly societies such as Australian Scholarships Group function more like a life company. Customers make contributions to a fund which will provide them with some future benefit. As with credit unions, shareholders are members and any surplus goes back into the company to benefit the members.

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.

Spoilt for choice

With so many different lenders in the game offering such a wide variety of loans, anyone in the market for a home loan is spoilt for choice. You’ll more than likely be paying your loan off for quite some time so make sure you choose an institution that offers you the customer service you require as well as the loan to suit you.

 

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