Competition assumes you will spend where the lowest price and best product offering come together, but competition has taken a strange turn in bank mortgages.
The global investment bank, UBS, released its report into the Australian mortgage market a week ago and found that the banks were earning more profit on mortgages (0.88 per cent after-tax) than at any time since 2004.
This is happening in part because the cost of banks’ wholesale funds is the lowest they have been for five years.
So, if it’s cheaper to provide a home loan, why aren’t the rates dropping?
Well, in many cases the rates are dropping… just not at the Big Four banks.
Have a look at a comparison site such as RateCity where the major banks’ standard variable rate loans are generally the most expensive on offer and the most reasonable priced loans are offered by credit unions, non-bank lenders and building societies.
The difference between RateCity’s lowest and highest variable rate is 1.91 percentage points, yielding a difference in monthly repayments for a $300,000 loan (with a 30-year term) of $369 per month. That’s $4,428 per year or $132,840 over 30 years.
Yet, around 90 per cent of all new mortgages are written by the Big Four.
Economists call this an oligopoly – the monopoly of many.
To create an oligopoly you need to be selling something that everyone wants and you need high barriers to entry, which discourages new entrants to the market. In an oligopoly, the participants don’t compete on price and product as much as they ‘match’ one another.
This is the current situation, but 2013 could be a year of change. The fact that UBS sees the banks profiting from the average Australian mortgage and predicts the market is due for a shake-up, suggests the capital markets see room for a correction.
I also note the formation of the Bank Reform Party, to contest this year’s federal election. They have a platform of competition and consumer protection and want to challenge the illusion of competition created when big banks operate behind brands such as St George and BankWest.
But the most important factor in competition is the consumer’s actions. So even though I – and others – predict strong competition in the mortgage market this year, reaping the benefits requires that people actively chase the best rates. This can mean switching to a lower-priced lender, or renegotiating your current loan – something most loan managers will do if they believe you will switch.
Mortgages can be emotional products, because the loan relates to your home.
But if you can see this loan as a monthly cost – similar to phone plans, car finance and internet deals – you free yourself to find the deal that’s best for you.
Mortgages are a commodity and there is no such thing as a designer mortgage or Armani dollars. All that matters is the best deal.
And remember: consumers drive competition, but only if they act.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. with any queries you may have or check for your nearest branch.