Big four should offer rate tracker mortgages: ASIC

by Miklos Bolza14 Oct 2016
Greg Medcraft, chairman of the Australian Securities and Investments Commission (ASIC), has thrown his support behind rate tracker mortgages, saying they should be introduced by the big four banks.
“These rate tracker mortgages are very popular overseas because the consumer knows there is a fixed margin earned by the bank over the life of the loan,” he said in an interview with the Australian Financial Review.
“The problem in Australia at the moment is there is a double jeopardy with standard variable rate loans. You don't know how your SVR will move and all the SVRs are not the same. I think the banks like the confusion in the market.”
Offering mortgages priced at a fixed margin above the RBA’s official cash rate would help eliminate this confusion, he said.
Medcraft’s comments – made prior to his appearance before the Standing Committee on Economics today – are at odds with those made by most of the heads of the major four banks made during last week’s parliamentary review.
The CEO of Westpac, Brian Hartzer, told the inquiry that tracker mortgages were “a recipe for a serious problem” for the banking industry.
“They’re fine when everything’s fine, but when things are not fine they become a real problem, and you can suddenly find that your cost of funds has spiked dramatically and yet you're unable to reprice your loan book,” he said.
“Tracker mortgages are really quite fraught from a risk point of view and we saw this in the GFC in particular.”
While the CEO of CBA, Ian Narev, said there was no “specific objection” to these types of loans, the bank’s chief risk officer David Cohen said that tracker mortgages worked well when rates fell but not when they rose.
“The experience of customers and banks offshore has been that they haven't worked so well when rates have risen again post GFC,” he said.
He pointed towards Lloyds Bank which offered tracker mortgages until 2014.
“It felt that a fixed rate, particularly in a rising interest rate environment, was actually a better deal for customers.”
NAB’s CEO Andrew Thorburn said that mortgages which tracked the cash rate would “raise a significant funding risk for us”.
“Our balance sheet, which is deep and wide, has got $200 billion of offshore funds which are not linked to the cash rate,” he told the inquiry. “So if we had too much business, and it was not priced correctly in the tracker portfolio, we are raising a significant risk for the bank.”
The only bank to be supportive of tracker mortgages was ANZ with CEO Shayne Elliot saying there was a “valid place” for the product in Australia.
“In fact, we have looked at it and we continue to look at it to see whether there would be a market proposition for us,” he said. “Our testing really comes down to ‘do we think that consumers would be attracted to it in sufficient volume to make it worthwhile?’”