What does a major bump in OCR mean for you?
The rate in its simplest terms is the cost of funds to the banks for overnight transactions to other banks and what is held in their settlement account with the Reserve Bank. So because the industry operates on margins, the lower the rate the lower the rates bank will pass on to clients. This is a very simple way to look at this as banks have multiple sources of funds for long term debts, such as their customers saving accounts, term deposits etc.
How does the official cash rate hike affect you?
It does, however; affect rates offered by most finance companies in the asset finance market as most finance companies receive their funds from the banks. Pre-2008 a large portion of the money that finance companies lent out was term deposits from customers. Nowadays most of the funds for prime lender’s come from major banks. So they borrow from the banks allowing the banks to make a margin, then they lend it to you the customer making their own margin – whilst wearing the risk of repaying that debt if you default.
This is why some finance companies’ rates move up and down with the OCR changes, then some don’t – as others receive their funds from term deposits. Finance companies that receive funds from term deposits typically have much higher rates than those borrowing from the banks. This is because of the compliance cost of operating as a deposit-taking institution, compared to a non-deposit taking institution.
How can Nobilo Finance help with OCR hike
As a broker, we work with a combination of both types of finance companies and place our client’s loans with whichever institution best fits their needs. In recent years there has been a third type of finance company come into the mix – peer to peer lenders. These lenders include the likes of Harmoney and the lending crowd. These providers allow the investors to pick and choose which loan they want their funds to be put towards and the associated return for it. The finance company then takes a % cut on the interest paid – so a much more transparent model than the standard finance company way of operating.
Overall we have found peer to peer lenders to have market-leading “headline rates” which very rarely get offered, they are based on 0 risk. So most clients tend to fall into their mid to high-risk category paying rates much higher, than they would achieve through standard finance companies with a flat rate, spreading the risk across their loan book between all clientele.
The OCR, therefore, has a significant impact on the asset finance industry noting the major players – all receive their funds from the banks, who pass on the increased cost of the OCR to the finance companies, who then pass it on to you – the client. Unfortunately, due to the volume of lending that finance companies provide, they receive significant discounts on their rates from the banks, hence a secured car loan with a finance company is 5% or cheaper than a bank loan as they just write it as an unsecured personal loan for your average consumer.
Also Read: What does a major bump in OCR mean for you
Banks prefer to stick to the high volume lends such as mortgages or very large business asset purchases. This is why some banks have branches out having finance companies operate with their funds, but under different branding – UDC is currently owned by ANZ, although they have been trying to sell them off for years now. Finance Now’s parent company is SBS bank and Marac Finance is owned by Heartland Bank. So it is a way for banks to still make healthy margins on their funds while keeping them off their balance sheets.
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This close tie to banks is another reason why movements in the OCR, heavily impact rates offered by finance companies in New Zealand and why working with a broker is the best opportunity to save you time in knowing which company is best to approach for your individual circumstances, ranging from affordability to the type of asset you are purchasing.
Sam has a passion for finance and helping clients, stemming from his own love of responsible lending and hearing of the joy a new asset or working capital can bring to you.