Funding cost pressures should ease by 2023: Pepper

Annie Kane| Mortgage Business| 2 August 2022

Funding cost pressures should ease by 2023: Pepper – Mortgage Business

Rising cost of funds are impacting both banks and non-banks at the moment, but should ease from next year, the non-bank lender’s treasurer has noted.

The treasurer of Pepper Money, Anthony Moir, has outlined that while lenders may be facing funding cost pressures at the moment, he expects that these will quickly right-side before normalising next year.

Speaking at the Pepper Insights Live event in Sydney (and online) last Wednesday (27 July), Mr Moir told broker delegates that “funding costs are going through the roof” as the cost of money rises.

He noted that, while the “price of money” had been low over the past two years (as the base rates were pushed down and margins being paid to investors were low), this has been rising rapidly, with both banks and non-banks feeling the squeeze.

For the banks, the maturation of the cheap funding offered from the Term Funding Facility is resulting in higher costs, while for non-banks, the margin paid to investors being securitised debt was increasing.

Mr Moir elaborated that the margin on Pepper’s securitisations had last year been around 75 bps to 1 per cent, but that had recently risen to 1.75 per cent.

He stated: “There’s been a 75 basis point increase in just the margin that I have to pay [to investors]. We need to recoup some of that – all non-banks need to recoup that…

“Non-banks, like ourselves, borrow all of our money from the wholesale markets. When there’s changes in those costs, we reflect them a lot quicker than what the banks do (because the reality is the banks only have half of their funding in those wholesale markets, and the rest in retail deposits)…

“For us, when there is a spike in funding costs, if we’re a diligent organization, we have to pass that through. And that is why you may have seen new lending rates increase quite significantly.”

However, he added that while this had been a “pretty significant increase”, he expected levels to “stabilize and come down” in the next six months after a period of “craziness”.

“The reality is, conditions are tightening, and they’re going to tighten differently for different institutions. So banks might have regulatory constraints (and we’ve seen caps been put on before for investor interest-only, LVR, DTI etc). For non banks, we’re going to have different pressures as well. So you know, what’s the composition of our portfolios? How does that stack up to our risk appetite?” Mr Moir said.

Mr Moir told brokers that lenders will likely start to shift to different risk appetites during this “more problematic or difficult period”, which will lead to a few more yes/no/maybe types of outcomes for brokers.

As such, he said it was more important than ever for brokers to ensure they had a diversified lender panel to utilise in order to find client solutions in this transitional period.

He concluded: “Interest rates are going up, property prices are going down, but hey, we’re just transitioning back to normal levels, pre COVID,” he summarised. 

“We’re seeing funding costs pressures, but from my perspective it’s good that this is going to happen quick. We’re going to normalise quick and we will be out of it quick. So 2023 should be a period of normality, rather than what we’re seeing today, which is a little bit of a period of craziness.”

He added that while both banks and non-banks would see pressures over the next few months, “the reality is we’ll end up at a pretty equal spot”.

“Banks [are] always going to be cheaper than us but eventually we’ll get to a pretty similar level,” Mr Moir