Party over for mortgagees

LENDERS in the non-bank and low-doc sectors are raising rates and ending discounts in response to the sub-prime crisis.

Party over for mortgagees

WHO will pay for the millions of failed sub-prime mortgages in the US?

It seems that RAMS customers and shareholders are among the first Australians to feel a financial sting from the global credit crisis. However they will not be the last.

The past few weeks has seen many lenders, especially in the non-bank and low-doc sector, adjust rates and end their discounting and honeymoon periods. The era of cheap discount home loans in Australia now seems officially dead.

RAMS, who along with Aussie Home Loans introduced discount mortgages to this country in the early '90s, are now charging existing mortgage customers a full quarter of a per cent more than the market average.

RAMS shareholders, who just two months ago forked out $2.50 per share in the non-bank lender's share market float, are now wondering whether it is worth keeping at a little under 50 per share.

They are tipped to accept Westpac's bargain basement offer to buy out the troubled company.

The RAMS standard variable mortgage interest rate now stands at 8.57 per cent, compared to 8.32 per cent from the big banks and an average standard variable rate of 8.06 per cent from other non-bank lenders Aussie, Resi, Sapphire and Wizard.

Unlike the big banks, credit unions and building societies, RAMS and other specialist mortgage providers do not have a big base of retail deposit accounts to draw on to fund their loan book.

RAMS is dependent on the global credit market to fund their mortgages, and recently they, like many other institutions have found it difficult to purchase credit for mortgages.

"Over the past week we have seen a lot of movement in the non-bank sector," said Mamta Grewal, financial analyst from research firm Cannex.

"A few of the lenders have raised their rates by 10 to 15 basis points over and above the 25 basis points rise from the RBA last month.

"But they have done it by ending their discounts and honeymoon periods," Ms Grewal said.

"They all say the rises are not due to the credit crisis, but is about the end of a period of discounting."

For customers looking to exit their high rate loan and refinance elsewhere, the news gets worse. All lenders have been jacking up exit fees on their home loan products over the past few years.

Switching to another lender could be an expensive exercise, especially if the loan is only a couple of years old.

In addition to the flat rate exit fee of $295, RAMS charges a percentage of the loan amount in early termination fees. Those fees, which are applicable to loans less than three years old can run into thousands of dollars.

"On a RAMS home loan of around $250,000, the early termination fees could total up to about $5000," said Ms Grewal, "that's compared to the bank average of around $700-$900."

RAMS needs its existing customers and needs to make the most of them.

"As part of the sale to Westpac, RAMS has agreed to a non-compete clause, so how they manage and extract value from their existing loan book is critical," said Ian Rogers, editor of banking industry newsletter The Sheet.

"It is now more important than ever before to look at the business model of the financial institution that you intend to borrow from.

"Any lender dependent upon the debt capital market is in a tricky position," Mr Rogers said.

"The retail banks have a lot more flexibility in how they access funding, so they are looking to take advantage now and grab back some of their lost market share."

The credit unions, likewise, are keen to stress their big retail deposit funding base.

"Credit unions and mutual building societies have a very strong liquidity position, and as the majority of our funding is drawn from retail deposits, cushion us from the market volatility issues affecting non-ADI lenders," said Louise Petschler, spokesperson for Abacus, the industry organisation representing credit unions and building societies.

"We're very well capitalised - over 15 per cent - at a higher level than the banks."