Home News $4bn cash injection to pressure banks to pass on rate cuts

$4bn cash injection to pressure banks to pass on rate cuts

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Nila Sweeney

Australian consumers will be the big winners benefiting from the federal government's move to inject $4bn into the non-bank mortgage market.

By buying high quality residential mortgage backed securities (RMBS) from the non-bank lenders, the government was able to provide some ammunition to smaller lenders in order to compete with the big banks.

While the $4bn outlay is a tiny sliver of the $240bn a year residential mortgage industry, Tony Crossley, CFO with Mortgage Choice, said the investment is a significant step in the right direction, towards renewed competition and a healthy mortgage market.

"Lenders can only lend the money they know they'll have," he said. "Smaller lenders have experienced more difficulty getting certainty on future supplies of funds in light of the ongoing US financial crisis. Those who meet the government's criteria will now be able to adjust their lending volumes upwards - by only a little at first - knowing that the money is there," Crossley explained.

Non-bank lenders have been frozen out of the lending market in recent times because they rely on overseas money to service customers, but that supply has dried up with the credit collapse in the US.
"This move will put pressure on the major banks to pass on any future interest rate cuts, adding another incentive for people to get into the market now," said John Edwards, chairman of Residex. "This will bring competition and liquidity back into the market."
 
Crossley agreed that the government initiative can only be a good thing for Australian consumers, not only because it will encourage a wider choice of home loans available on the market, but also because it should have a downward influence on interest rates.
"I hope more contributions will follow. There's a good chance more contributions will follow, but in this environment nobody is betting on anything," he explained.

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