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Response to the article \"Non-bank lenders fail to pass on interest rate cuts\"

Letter to the Editor of the Sunday Telegraph

by Peter White, FBAA National President

Dear Editor,

I write in regard to Andrew Chesterton's article in last weekend's Sunday Telegraph (19 October 2008), Non-bank lenders fail to pass on interest rate cuts.

The views expressed in the article are fundamentally flawed as it makes mixed comparisons between the various types of mortgage products that are available in the Australian market. Whether this was done through a lack of understanding on the author's part or simple convenience for the sake of a headline remains to be seen.

So let's set the record straight. Non-conforming loans come in many shapes and sizes and offer a legitimate financial solution for many aspiring home owners who do not fit the typical borrower profile for a prime mortgage (as generally offered by the banks). The type of borrower requiring a non-conforming mortgage could include the self employed who often require low documentation loans. Those borrowers with a blemished credit history often don’t fit the prime mortgage criteria either and therefore require a sub-prime mortgage.

Regardless of the type of mortgage product, the applicable interest rate is predominantly based on risk and this remains true whether it be a prime, low-doc or sub-prime mortgage. In short, the greater the risk profile of the borrower the higher the interest rate and that’s why a borrower with a less than perfect credit history seeking a sub-prime loan, for example, will pay a higher interest rate than a borrower who is eligible for a standard prime mortgage. It’s no different to an insurance company charging an 18-year old P-plate driver a higher premium than an experienced motorist as the risk of accident is statically higher.

So to compare a non-conforming mortgage product as offer by GE or Liberty with a CBA prime mortgage product is blatantly unjust.

The article also misleads the reader in that it asserts that broker commissions for low-doc loans are generally 60% higher than for prime loans. Once again, this simply isn’t true. Mortgage brokers generally receive upfront commissions between the acceptable range of 0.5 - 0.8% on each loan written. It is inaccurate to make the generalisation that brokers make higher commissions from one particular form of loan over another as it varies greatly depending on the lender. There are no hard and fast rules here.

It achieves nothing to take cheap shots at the non-banking sector. It must not be forgotten that it is the non-banks who brought competition to the Australian market and helped to drive down interest rates for all households. It's unjust to imply the business decisions by the non-banks with respect to rates are driven by greed, particularly in an economic environment where the sector is under increasing pressure due to the increased cost of funds.

Peter White
National President
Finance Brokers Association of Australia (FBAA)