Home Loans War Certain To Escalate

Sydney Morning Herald

Tuesday May 21, 1996

By TOM ALLARD and NATHAN VASS

The scene is set for a rapid escalation of the home mortgage war after the State Government announced yesterday it would abolish a tax on borrowers who switch their loan in search of lower rates.

The scrapping of the loan security duty on refinanced loans means home borrowers will save $341 if they transfer a standard $100,000 mortgage to a new institution. All up, the cost of refinancing a standard loan will be reduced to around $1000.

Business borrowers will potentially save tens of thousands of dollars, with the current duty on refinancing a $3 million loan standing at $11,941.

The Treasurer, Mr Egan, said yesterday the move had the potential to spark an interest rate war between banks and other lending institutions, benefiting new as well as existing borrowers.

Tens of thousands of people will gain from the change. Last year, 28,000 households and 17,000 businesses in NSW refinanced their loans, accounting for $2.8 billion (or 18 per cent) of the total value of home loans and 16 per cent of commercial loans.

Banks with customers locked in to interest rates at the higher end of the market would come under increased pressure to cut their rates to retain business, or face the prospect of losing out to the cheap non-bank lenders such as RAMS and Aussie Home Loans.

The non-bank lenders have their biggest presence in NSW, already arguably the most competitive lending market in Australia.

While all lenders - from banks to the new players - welcomed the move as a win for consumers and a fillip to the moribund housing industry, the non-bank lenders who lobbied the Government for the abolition of the tax were ecstatic.

"It will give us more ammunition to get the banks and it means there will be less pain for the customer to switch," said the managing director of Aussie Home Loans, Mr John Symond . "And it will put more acid on the banks to get serious and slash their high profit margins."

Aussie Home Loans - which offers a variable rate of 8.9 per cent compared with most banks' standard variable rate of 10.5 per cent - sold $175 million worth of home loans in NSW last month.

Mr Symond said more than $50 million of that business came from disgruntled bank customers switching their loan. Clearly, the boom in refinancing home loans is already underway, with the average length of a mortgage having been slashed to just four years from seven years at the start of the decade.

Ms Lyndell Deves, a spokeswoman for Australia's biggest home loan operator, Commonwealth Bank, said the bank supported any initiative which cut costs for consumers.

"We are getting our fair share of people moving loans coming to us, particularly to our fixed rates," she said.

Commonwealth Bank, like most banks, has a standard variable rate of 10.5 per cent. It has preferred to use low fixed rates and special one-year "honeymoon" deals to entice rate-conscious customers and prevent a mass desertion of its existing borrowers.

While the fixed rate deals have attracted borrowers, four out of five loans still carry a variable interest rate.

"I think anyone with a (variable) mortgage rate of 10.5 per cent will be very keen to shop around for a lower rate once the refinancing tax is lifted," said Mr Egan.

"Until now, banks and financial institutions have been protected in NSW by a tax on loan refinancing that has discouraged borrowers from shopping around for a better deal.

"Today, we've swept that shelter away and given borrowers more clout in the market. I hope this will set off a new war on interest rates from which home buyers and business people will emerge the big winners."

Sources said Mr Egan had long supported the scrapping of the tax, driven largely by a belief that bank profits had continued to be too fat despite the deregulation of the industry.

Victoria has removed the tax for businesses only, while Queensland is considering removing the duty, but capping the benefit for refinancing of loans up to $100,000.

While borrowers will still have to pay stamp duty on new home loans, banking and housing industry analysts hope the sluggish housing sector will be boosted.

LOAN REFINANCING
WHAT YOU WILL SAVE
Loan amount $ Saving $
20,000        21
40,000       101
60,000       181
80,000       261
100,000       341
120,000       421
140,000       501
160,000       581
180,000       661
200,000       741
400,000     1,541
600,000     2,341
800,000     3,141
1,000,000     3,941
1,500,000     5,941
2,000,000     7,941
2,500,000     9,941
3,000,000    11,941

© 1996 Sydney Morning Herald

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