Loans Expert

THERE’S exquisite irony in Aussie Home Loans getting into bed with the Commonwealth Bank. The biggest bank provider of home loans and the biggest non-bank player in the home loan market. But much more specifically, the company and person – Aussie’s John Symonds – most responsible for breaking the banking lock on home loans. And in doing so, slicing into the bank margins on home loans.

For no one can take greater credit for putting more people, more affordably into homes than Symonds. And as a result putting one particular person into a rather biggish home on the harbour. Back in the early 1990s, the banks charged as much as 4 per cent above the official RBA cash rate on home loans. As Aussie and its peers such as RAMS and Mark Bouris’s Wizard got cranked up, they were forced to halve that margin.

Of course everyone got rich on volume. Banks and non-banks alike pumped out home loans as if there was no tomorrow. Until we discovered that there was: a sub-prime tomorrow.

What the banks lost in terms of rate margin, they more than made up in that volume. On the other hand, what borrowers saved on the actual rate, they ‘gave back’ in bigger loans and so bigger repayments. Indeed, repayments as a share of household income rose sharply, People today are paying more of their income with rates around 9.5 per cent than they paid when rates were – briefly, back in 1990 – 18 per cent.

With the ‘old’ part of RAMS now in work-down mode and the ‘new’ RAMS snuggled inside Westpac, does the Aussie-CBA link mark a major blow against the sort of competition that kept – indeed, turned – the banks honest?

Equally does it either leave competition depending entirely on Wizard? Or create a huge opportunity for Wizard and a smart young man named Bouris? The answer to the first question lies somewhere between no: it’s actually a very smart move – by Symonds – to give Aussie a continuing competitive edge. Which then begs the question of why the hell the CBA would do it.

And yes; but that non-bank competition had arguably already been killed by the sub-prime meltdown which had destroyed the non-banks’ funding source. And incidentally, RAMS. With Bouris’s audacious move to cut Wizard’s home loan rates ahead of the RBA and so, by definition, the banks, really confirmation.

While also demonstrating yet again the non-bank flair for – positive – publicity. Which the names Symonds and Bouris have been so prominent in. The non-banks now face going back to a ‘building society future’. Where they have lost their ability to tap big-sum wholesale finance, and instead have to raise their money from ordinary depositors by offering better interest than banks.

That’s tough at both ends. Especially post-sub-prime when security is now king. Who’d put their money in a non-bank for an extra, say 0.5 per cent? But further, it only ‘worked’ in the good old days when building societies were able to operate on much finer margins than banks. No more: the banks have learned to exist quite nicely in a 2 per cent rate margin space.

So non-banks only have a future by doing precisely what Symonds is doing with CBA. And why competition czar Graeme Samuel shouldn’t and won’t interfere. It also makes sense for the CBA. Because it won’t spawn a 1990s style monster to rip away at its profits from the inside. While it does broaden its borrower catchment in the post sub-prime reality.

It’s also ironic on a personal level. Symonds used to very deliberately and directly target the CBA.

For obvious reasons: that was where the money and the customers were. The home on the harbour is a pretty graphic and highly visible – and uniquely appropriate – sign of success.

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Tags: home loans