While there is a lot of anger directed at the big banks for hiking interest rates higher than the RBA, new ideas surrounding introducing more competition into the mortgage market should be explored.
At present, banks are reliant on sourcing their funds from the global money markets. The price of money has risen considerably following the Global Financial Crisis, meaning they have had to pay more to borrow the money they then lend to Australian homeowners.
Because of their size, the larger banks such as Westpac and the Commonwealth can access money at a cheaper rate than the smaller regional banks and non-bank lenders, who have been disadvantaged over the last three years. The larger banks have taken the lion’s share of the home lending market, while the smaller lenders have been priced out.
The Canadian model, which is operated by the Federal Government under the auspices of the Canadian Mortgage Housing Corporation (CHMC), has worked exceptionally well since it was set up post World War II.
The way it works is that the CMHC puts out Canadian Mortgage Bonds and behind them, as security, is a collection of eligible mortgages backed up by mortgage insurance. These are then turned into virtual government bonds because the Canadian Government stands behind them. They also access the money at good interest rates because of the standing of the Government.
“The Canadians have a great system where they provide a government-backed method of providing cheaper funding to institutions that package home mortgage loans into market securities for non-bank lenders first and, if there’s money left over, it can go to banks,” he said.
“It is vital for competition to have a strong, robust system where smaller lenders can compete with the big boys.”
Phil Naylor, who is the chief executive of the MFAA, said his body supported the Canadian model in its submission to the Inquiry into Competition in the Bank and Non Bank sectors, which is currently underway in Canberra.
“The Canadian Mortgage Bond system assists competition by ensuring there is a quality flow of securitised funds available to non bank and bank lenders,” he explained. “This ensures there is a wider range of lenders in the mortgage market offering mortgage loans.
“We would argue more lenders means greater competition and, therefore, a downward pressure on interest rates.”
“Our view is that any system which enables more lenders to be viable in the market will produce interest rates which are lower than they would be with a small number of lenders in the market.”
Photo credit: Andrew Hildebrand / Royalty free