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Competition Imperative to Ensure Reasonably Priced Home Loans

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While over the past two decades there has been increasing competition within the home loan market, government support during the global financial crisis has allowed the major banks in Australia to significantly increase their market share where loans are concerned.

The non-bank sector first brought real competition to the loans market in the early 1990s when they were able to offer long term principal and interest loans to the Australian borrowing public at a much lower interest rate than that being offered by the major banks. Variable rate home loans were available through the non-banks at interest rates that were up to 2% p.a. below variable interest rates being offered by the major banks Best Home Loans in Canberra. For the first time Australian borrowers were able to access very competitive standard loans from reputable alternative institutions other than the banks. As was to be expected, the four major banks in Australia initially held onto their high interest rates and profit margins because they were confident that the non-bank sector would be a “flash in the pan”. In their view borrowers were unlikely to place their home loan business with these new entrants in the mortgage market. The banks miscalculated and borrowers were quick to take up the loans offered by the non-bank sector and enjoyed significant savings in interest repayments as a result.

While initially the non-banks were only able to offer standard variable rate type products, as the mortgage market evolved home loan lenders in both the bank and non-bank sectors increased the features and home loan product types available to the borrowing public. Even cheap loans today will generally offer a redraw facility and options to fix for a period during the loan term. Home equity loans have been very popular because of the flexibility and features they offer borrowers and no deposit loans also appealed to first home loan borrowers /buyers because this type of mortgage enabled those with good incomes but little savings to enter the home market and invest into property.

There is now a wide variety of Australian loans available on the market and borrowers can now more easily compare the interest rates and features on offer. While traditionally borrowers would approach their bank for a loan and generally accept the terms and conditions offered without question, today they have a number of resources available to them to ensure that the mortgage they go with is competitively priced and well-suited to their needs. Borrowers now have many reputable mortgage brokers to which they can turn for assistance in arranging their loans. Online home loan comparison calculators are also readily accessible and allow a borrower to compare the existing variable interest rate loan they hold with another product they may be considering from a refinance perspective.

The global financial crisis has changed the mortgage market considerably because the playing field is no longer an even one. The Australian Federal Government offered their guarantee to any borrowings by the major banks at a much lower cost than that charged to the second-tier banks. The cost of funds for the latter entities is therefore more expensive and as a result they have not been able to compete with the major banks on interest rate. Until the government withdraws the guarantee the playing field for lenders in the home loans market will not be a level one.

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