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Banks awash with money to lend! Price war emerging!

Marty McDonald - Wednesday, March 02, 2011

Just when you thought the major banks were going to get all cosy in their oligopoly after seeing off the challenge from smaller lenders and non banks they go and start a home loan price war!  

Why are they getting into a price war on home loans?

The word is they are awash with money to lend and housing loans are seen as the best / only place to safely deploy their funds.

With development lending still seen as too risky, commercial loans not performing that well and corporate borroweres not interested the only other sectors left to lend to are SME businesses and home loans. With SME borrowers also being reluctant to borrow that leaves just home loans to lend to.

Why do they have money to lend now?

 

It all goes back to the GFC and the fright that lenders got when they saw their funding drying up. Luckily for most Australians (except those with funds in frozen mortgage trusts) the government stepped in and guaranteed their off shore borrowings.

So the big banks borrowed up big earlier last year expecting SME business lending to explode when the economy recovered. Remember all those small business banker ads?  But guess what business lending has not taken off. It is clear most businesses big and small are still wary of taking on debt. Not to mention business debt is now harder to get and much more expensive (relatively) than in the past.  

 

At the same time people are saving more and self managed super fund trustees are holding more of their assets in cash rather than shares. 

The net result for the banks is they have much more cash floating around to lend than they thought they would at this stage in the business cycle and the only place they can lend it to is Mum and Dad home owners. Considering they already control most of the market the only way to grow is to take ecah others buisness. Interesting times!

So what’s next in this price war?

 

1)      More discounts. You definitely have more sway to negotiate on rate now; in fact I can’t remember when lenders have been as willing to negotiate on rate especially if you have good equity and a decent loan amount.

 

2)      After continual credit tightening over the last 3 years we are now starting to see the first real signs of loosening of credit standards. While I am not sure this is a great thing it has to be noted that about 9 months ago the stats were that 1 in 4 home loans were being declined so I think it would be fair to say the pendulum at that stage had swung too far in favour of conservative lending practices.  

 
I do have to laugh at how quickly lenders change their credit policies depending on what the directives / sales targets from above are. It could be said that over the last 3 years the credit department has been running the banks and prior to that it was the sales departments. I think we are about to see a fight between the two that ultimately the credit department can’t win.

What’s in it for you? 

 

If you have a loan currently and have more than 25% equity in your property do yourself a favour and either get a broker to do a health check on your loan for you or call your bank to see what they can do for you on your rate. As a benchmark, for loans over say $400,000 and with an loan to value ratio** of less than 75% you should not be paying more than 7.20% pa and you should be able to get it below 7.00% pa. On a $400,000 loan if you can save 0.3% pa that equates to $100 / month in your pocket. Well worth a phone call.

 

** Loan to value ratio or LVR for short is your loan amount divided by the value of your property expressed as a percentage. For example a $450,000 loan secured by a property worth $600,000 would have an LVR of 75%.

Regards,


Marty McDonald

About the Author: Marty McDonald is principal of mortgage broker “Mortgage Experts”. Marty specialises in assisting active property investors with loan structuring advice and implementation as well as helping credit worthy borrowers with slightly outside the box income and employment situations. Find Marty on and LinkedIn.

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