In a week that saw the ‘people’s choice’ become re-elected as the President of the United States, I was lucky to be associated with an Australian move to democratise mortgages. Many readers would have seen the stories in the media about the fact that my business – Yellow Brick Road – and Macquarie Bank have come together to market a more affordable mortgage product to everyday Australians.
These mortgages will be offered at a 1.15 per cent discount on our base variable rate loan in the first year, reverting to up to a 0.86 per cent discount for the life of the loan. In the first year these mortgages will have interest rates of around 5.5 per cent.
The Big Four banks’ standard variable rate mortgages have an average interest rate of around 6.62 per cent, so you’re probably wondering how an organisation like Yellow Brick Road can market its own mortgage for 5.5 per cent. The answer lies in the difference between a risk premium and a customer discount. That is, in Australia we can accept that someone who is wealthy will get a discount from the bank on their mortgage rate. But what Australians will not accept is that they pay more than their neighbour because they are perceived as being riskier.
So the banks do something very clever: they place the higher risk premium on all of their standard variable rate loans. Then the banks offer ‘professional packages’ to customers they perceive will use more services with the bank and add to profitability: so they drop the mortgage rate from 6.62 per cent to 5.9 per cent for their high net-worth customers who borrow more. Proof that this works can be seen in the fact that all the big banks do it. We’ve turned that idea around, and democratised the mortgage discount.
Rather than customers waiting to be selected for a lower rate, we tell everyone they can have the lower rate, which after the first year, will be set at a similar level to the banks ‘pro pack’ mortgages. This move is part of a broader philosophy that I’ve been pursuing since starting Yellow Brick Road. And that philosophy is this: only when the consumer is treated as an important and informed part of the banking system, will we have a truly ‘stable’ system.
An informed consumer knows how to take a home loan that is best for her circumstances and knows how to pay it off faster than the bank wants her to. And the benefits of competition only exist when there is real choice upon which consumers feel they can act. I worked to offer choice when I ran Wizard in the 1990s and 2000s, and in those days the borrowers responded.
But while lenders like Yellow Brick Road can disrupt the mortgage market with a discounted interest rate, the borrowers must have the confidence to act. We have a way to go to get Australians back to full confidence, but I hope this new home loan shows all consumers what is possible. *all percentage interest rates are annual percentage values
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on mark.neos@ybr.com.au with any queries you may have or check www.ybr.com.au for your nearest branch.