Beyond Home Loans

The Age

Monday February 17, 1997

JANELLE CARRIGAN

Mortgage originators are posing a new challenge to banks by expanding into credit cards, insurance and business loans, writes Janelle Carrigan.

BANKS are playing non-bank lenders at their own game, discounting home loan rates to regain market share. In turn, mortgage originators are moving in on bank turf by offering a range of new deals including discounted credit cards, insurance products and business loans.

"If we just rely on the interest rate of the home loan we will be very exposed," says Aussie Home Loans' managing director, John Symond. "That's why we've been working on these value add-ons."

While customers will benefit directly from increased competition with cut-price credit cards, personal loans and eventually no-frills savings accounts, mortgage originators may lose their edge in the discount stakes by being forced to expand operations. As they pride themselves on low overheads, introducing products other than home loans could eat into profits.

After all, competition has cost the banks dearly. One of the major banks admits the influx of new home lenders in the past few years has cost millions of dollars in lost loans. Banks' market share has dropped from 85 per cent to 82 per cent in the past year, translating to substantial lost revenue over the 25 years of a loan.

Mortgage originators such as Aussie Home Loans, RAMS and AMP's Priority One are still holding their lending ground, rising from 9 per cent to 13 per cent of the home-loan market share in the past year. Although these lenders endured a slump in late 1996, the total number of houses financed jumped 36 per cent in December while banks financed only 2 per cent more houses.

The mortgage originators' growing hold on customers who have turned their backs on banks may slow down as costly new products are introduced. The two largest mortgage originators, RAMS and Aussie Home Loans, are rolling out credit cards and insurance products in the next couple of weeks. Designed to compete directly against the banks' cards, their interest rates could be up to two percentage points lower.

Mr Symond says cards will initially be offered to Aussie Home Loans customers, with the card made public after three to four months. RAMS is remaining coy about its credit card deal, saying only that the card should be available by the end of the month. The card may be co-branded (linked to another institution or organisation) meaning card holders may benefit from a rewards scheme similar to Telstra Visa or Ansett Frequent Flyer.

While a few new credit cards flung into the market may not seem like a groundbreaking move, it's a giant step towards greater consumer choice. Traditionally, banks have held a monopoly on retail financial products, but as the past few years have shown, the non-bank lenders' move into discount home loan deals has forced banks to lower interest rate margins to compete for the consumer dollar.

This is now extending to other traditional bank products. Aussie Home Loans has moved into the business loan arena, with a discounted standard variable 7.49 per cent loan. The banks' small-business loans start from 7.25 per cent (National) to 9.75 per cent (ANZ), with a margin of up to 3.5 percentage points added at the banks' discretion. Unlike traditional small-business loans that lend on the business's potential earnings or assets, Aussie's business loan is secured on the borrower's first residential mortgage.

It doesn't stop there. "Car loans, credit cards, savings accounts - it could extend into a complete range of retail financial services," says Tony Gill, managing director of Puma, the largest provider of funding to non-bank lenders such as Aussie and RACV. "That is what is happening overseas and I expect that trend will be followed here."

In the United States, product specialists compete alongside banks, says Mr Gill, with almost two-thirds of mortgages now written by alternative lenders.

Insurance is also booming, with Aussie Home Loans' new insurance products extending to household, contents and car coverage.

But before we commit to a range of new, cheap credit cards, we should look to the American experience. Credit card default is at its worst in five years, jumping by almost 25 per cent since 1995. Around 5.5 per cent of card payments are now more than 30 days overdue. With around $7 billion currently outstanding on credit cards in Australia, we also have the tendency to charge rather than use cash.

At this stage, banks are not sounding the alarm bells over the introduction of new products, but like the home loan interest rate wars, some are quietly looking at ways of keeping customers happy. In the past year the ANZ has introduced a phone-based offshoot, ANZ Direct, that is now offering car loans. This may prove to a competitive advantage, as alternative lenders have shied away from personal loans due to their high administration cost and low returns.

ANZ Direct's no-frills Home Saver loan, on 6.9 per cent, carries the lowest interest rate of all institutions. The phone banking arm has moved its basic rate down to compete against the big mortgage managers.

Aussie Home Loans' standard loan, now on 7.49 per cent, was once one of the lowest rates around, but is now undercut by most of the major banks. The Commonwealth's basic Economiser home loan sits on 6.95 per cent and Westpac's First Option home loan at 7.29 per cent. National Bank is the last major to take the bait, moving its standard variable rate from 8.25 per cent to 7.55 per cent today.

Banks' competitors are dismissing the discounted deals as a "flash in the pan", suggesting that while banks were quick to lower rates, they may be just as quick to raise them. "You don't necessarily want the best rate today because they may not have the best rate tomorrow. What you want is somebody who is always going to have a good rate," says Mr Gill.

Non-bank lenders have resisted the urge, or been unable to squeeze margins further, to push rates under the 7 per cent barrier except for Finance Express, who sits at 6.99 per cent. Most drift around the 7.50 per cent mark and attract no ongoing fees but usually carry an establishment fee. Banks, on the other hand, are offering cheaper rates but hitting customers with ongoing fees to regain some losses.

The Commonwealth carries an $8 monthly fee on its basic loan, and as of today new customers will also be charged this fee on the 7.55 per cent standard variable home loan. The bank also announced the introduction of a $300 application fee. With these charges calculated into the total cost of the mortgage to reflect the real cost of borrowing, the basic rate averages to 7.1 per cent and the standard loan averages to 7.70 per cent.

The bank says these fees have been introduced to cover administration costs that were once absorbed by higher interest rates. Rather than charging customers higher rates, the Commonwealth is keeping rates low and making no secret of ongoing charges.

© 1997 The Age

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