Borrowers Winners As Banks Do Battle
Sydney Morning Herald
Friday June 14, 1996
Fear of the new intruders into the market it has dominated for decades has forced the Commonwealth Bank (CBA), Australia's biggest lender, to start a home loan war which has slashed its profits.
Two weeks ago it shocked the banking industry by cutting variable home loan rates back to 9.9 per cent.
Yesterday, it moved quickly again to match the National Australia Bank when that bank dropped its variable rates to 9.75 per cent. And ANZ and Westpac promptly followed suit.
Home loan borrowers are delighted they are finally seeing the banks work hard for the business but they - and the Keating Government - missed out on a rate cut before this year's Federal election because the banks decided that to move at that time would be "politically loaded".
CBA began developing its rate cut strategy and its basic "Economiser" home loan, which carries a rate of 8.9 per cent, late last year.
CBA executives have told the Herald that a pre-election rate cut was hotly debated at senior levels, but rejected because the Government owns a major stake in the bank. Executives also decided they needed to conduct more consumer research.
CBA's head of retail banking, Mr Alf Long, confirmed that a pre-election cut was an option but said the bank had not completed its market research until a few weeks before the rate cut was announced two weeks ago.
It was also important for CBA to cut rates before the Government sold its remaining $5 billion stake in the bank to the public this month or risk accusations of withholding information from its new shareholders.
"I think we chose the right time to do it and everything that has happened since then has proven it," he said.
Senior management recognised that new non-bank lenders such as Aussie Home Loans were making huge inroads into the $140 billion home loan market. Moreover, the huge differential between bank and non-bank home loan rates - typically 10.5 per cent versus 8.9 per cent - could not be sustained.
The low rates have enabled insurance companies such as AMP and mortgage originators such as Aussie and RAMS to poach bank customers and quickly grab 10 per cent of new home loan business.
The refinancing boom has seen the average length of a mortgage drop to about four years, from seven years in 1990.
Home loan industry analyst Mr Chris Gosselin, from Marketfaxts, said CBA's rate cut had transformed intermittent skirmishes between the banks into a full-scale home loan war.
While banks kept rates high for most of their customers, they had been attempting to counteract the new cheap lenders by setting up separately branded companies (Advance Bank), creating cheap loans but not publicising them (Westpac) or using subsidiaries to offer discount loans (NAB with Bank of New Zealand).
Mr Gosselin described these strategies as "defensive", designed to stop disgruntled customers from leaving. By keeping the cheap loans low profile or marketing them under a different name, the banks avoid antagonising existing, more profitable, customers on higher rates.
"These products are designed so that if someone on a high rate says they are going to leave, the bank will whip out the cheap loan and convince them to stay," he said. "Now they are being forced to cut rates across the board."
© 1996 Sydney Morning Herald
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