My non-bank lender is increasing my rate by 0.15 to 3.99 per cent. It says “in the past six months, bank bill rates which form the basis of wholesale funding of many lenders have continued to rise. We have … absorbed the increased costs to date.” But then I see they are advertising the same exact loan product at a hugely discounted price. This is my second lender. My first lender was also a non-bank one and when I took out the loan the rate was super low but over the years the rate crawled up to be more in line with other lenders, but what they too advertised was still dirt cheap. I'm wondering: is this all a big con?
Ah Ben, you’ve stumbled across the mysterious – and sometimes dark – art of discount mortgage pricing.
And it’s your bad luck you seem to have encountered the worst application of it … twice.
Yes the headline rate is designed to entice you. This is, of course, a common commercial tactic, and pricing could even be what’s called loss-leading, where the vendor at first expects to lose money.
Once you’re in, you’re typically not treated nearly so well – existing customers are often used to fund discounts to attract new ones. Think your electricity, insurance and, yes, sometimes mortgage.
You may know lots of smaller lenders have increased variable rates recently, as it gets more expensive to borrow money in wholesale markets, and the majors are expected to follow suit soon (ANZ’s ‘cut’ was extremely limited).
There’ll be quite the kerfuffle when that happens – it’s big news because these increases usually apply to existing and new loans.
And that’s where the non-banks get a bit sneaky. Unless they hike their headline look-how-cheap-we-are –rates, the moves will fly under the radar of the rate comparison houses.
As Peter Marshall, product data and compliance manage at Mozo, says: “It’s a pretty common practice and it’s really hard for us to have visibility of because we only get told what they want the public to know.”
But there’s also some legitimacy to it. “Non-bank lenders obtain a bucket of funds at a particular price and everyone within that bucket has to move with it. They have to go to the market to get new funding and the price could have changed,” Marshall says.
For this reason, discount lenders will often have multiple tranches of existing customers on different rates – the interest changes with reference to whatever the seductive starting point.
But be aware that big lenders will too … their advertised rate is nothing more than a starting point for negotiation. In a nutshell, banks give secret discounts to new customers and then hike in plain sight; non-banks fully disclose what you’ll pay at first and then any hikes are hidden.
It’s when your non-bank rate creeps close to a bank rate that you want to become a new customer once more (by refinancing again). You’ve made big savings nonetheless.
Nicole Pedersen-McKinnon is a money educator and consumer advocate. email@example.com.