Speaking at the National Press Club in Canberra on Wednesday, Greens leader Richard Di Natale called for a government-owned ‘People’s Bank’ to be set up to compete with the commercial banks by providing mortgages with interest rates as low as 3.5%. This radical plan to give Australians access to much cheaper home loans than are currently on offeris another big four bank bashing. The lender would be the Reserve Bank of Australia, and the loans would be delivered through Australia Post shops. The mortgages themselves would be “no-frills mortgage trackers”, meaning they would be formally linked to the cash rate. Crucially, borrowers would only be able to borrow up to 60% of the value of their home – much less than the standard 80% to 95% offered by other lenders.
Here are some of the policy’s key details, in Mr Di Natale’s words: “The minimum interest rate would be set at 3% plus approximately 0.5% for the administration costs of contracted service provides…… the interest rate would go up with the cash rate if it rises above 3%, but it will always deliver loans that householders can pay off faster and with significant savings on interest compared to the current offerings of the big banks….”
So, is it a good idea? According to Stu Varidel, Principal of Heart Financial Advisers who said: “the concept is very concerning that a politician could be so rampantly stupid with an announcement that would have been accredited with an April Fools Day prank.” He went on to make the following observations:
“The plan is a big fail for the following reasons:
There is an incredible amount of competition already with mortgage brokers writing close to 2.5 out of 4 mortgages written in this country every day. The big banks stranglehold on the mortgage market has ended with a much wider offering and spread of loan lodgments. There is no need for the RBA to meddle in the market.
Smaller banks and building societies often offer better rates than the big banks, and many are offerring rates as low as or lower those touted in the Green’s plan. So, how is this a benefit to the consumer?
It would create a very bad conflict of interest. The once government-owned Commonwealth Bank, which until 1959 was both a mortgage lender and central bank. That meant it was both regulator and participant in the market it was regulating. In 1959 the Menzies government decided it was an unacceptable conflict of interest for Commonwealth Bank also to be the central bank and the same principle applied today. You would think politicians could see a conflict of interest here?
The Australian economy does not need more cheap money as the property market has been overfueled due to cheap money.
It’s not as if there’s any shortage of housing finance in Australia, in fact we’ve got too much and this potential source of more cheap money would be very damaging to the economy.
Because the RBA would only cover 60% of the house price, it would only really benefit those who could save up the remaining 40% as the rest, to borrow the remaining 20 per cent from a lender at much higher rates of interest due to being a second mortgage. It will also mean for many, having to jump through the hoops of two loan processes is going to be very time consuming and may provide only an equal outcome to what could be done with some lenders.
Australia Post is not equiped to act as a credit analysist and manager of credit. This will create major issues of compliance with extensive and rigorous regulation.
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