Nano Digital Home Loans has suspended new home loan applications amid soaring funding costs, spoiling the lender's future growth plans. 

“Nano can confirm it has paused taking new applications in its direct-to-consumer mortgage business,” a spokesman said.

“The decision was made in the ordinary course of business as we wait for funding costs and credit spreads to normalise.”

As non-banks are not Authorised Deposit-taking Institutions (ADIs) they have to rely on sources of funding other than customer deposits to fuel their operations, such as mortgage securities, which have become increasingly expensive.

Currently non-banks are having to pay around 1.50% to 1.70% on top of the one-month Bank Bill Swap Rate (BBSW - currently around 2.70%) - which is the base interest rate - to investors of the safest mortgage pools.

This means many lenders would lose money on new loans written as their wholesale funding costs outweigh the interest rates received from new business i.e. the spread.

Previously Nano said it planned to launch its first mortgage bond in early 2023 after it amassed $550 million in mortgages in the first year of operation.

Rising interest rates and increased market volatility have concerned investors of non-bank lenders, thus making fundraising more difficult.

James Austin, CFO of non-bank lender Firstmac, said new fintech lenders have struggled recently simply due to unfortunate timing.

“The past three to five years has seen a number of new entrants in the non-bank and neobank sectors with many initially thriving, particularly over the past two years as the market was awash with liquidity,” Mr Austin told Savings.com.au.

“More recently, central banks have been actively reducing liquidity in the market through aggressive interest rate hikes.

“This has placed pressure on both the availability of funding and the cost of that funding.

“This environment is particularly difficult for smaller lenders as they have fewer funding levers available to them.”

In order for non-bank lenders to push through this tough time, Mr Austin said more capital will be needed to support ongoing operations.

This comes after Firstmac settled a $1.76 billion residential mortgage-backed security (RMBS) on Thursday, with the top tranche paying 153 basis points above the one-month BBSW. 

Will we see more non-banks struggle in the coming months?

According to Mr Austin, it’s difficult to know whether any other smaller, newer non-banks will close their doors until the central bank reaches its targets.

“Will we see more non-banks cease originations? That really depends on how long it takes for central banks to arrive at peak interest rates and how much damage is done to the economy in the process of bringing inflation under control,” he explained.

Currently, the RBA's cash rate stands at 2.60% and many bank economists expect this to reach up to 3.60% by early 2023.

Earlier this week, AMP Bank launched its 10-minute digital home loan in partnership with Nano.

The digital mortgage, which makes the refinancing process simpler and faster, will not be affected by Nano’s suspension on new home loans.

AMP's digital home loan is initially for customers looking to refinance an existing home loan with another lender to the AMP Essential Home Loan. 

The offer will extend to new loans in 2023.

In the interests of full disclosure, Savings.com.au is an associate of Firstmac.

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