In the last few weeks we have seen mandates go out by all the banks saying that they will not be pricing loans as they previously have. While mandates like this have gone out before, the difference with this one is that we are now seeing banks doing precisely this.
In recent years we saw banks offering massive discounts on interest rates and huge cash contributions. The banks believed this aggressive pricing would secure growth but what it actually did was create a very unhealthy environment that was financially unsustainable. Why? Because clients could see that if they refinanced to other lenders they could secure cash incentives that were significant. Banks generally conceded that for every client they lose it will take 2 new ones to replace them.
The pricing wars seemed great for the consumer because they could access literally thousands of dollars just to change banks. It was great for mortgage brokers because the demand for clients to refinance was huge. But it was not healthy for the the banks who were funding this as it did not secure the growth they were looking for. All we saw were a reassignment of the lending portfolio between each bank. Clients were jumping from bank to bank just to get the cash incentives. Some clients would do this every 6 months.
So banks tried to address this with a cashback agreement whereby if a client refinanced their lending within 2 years they would have to pay some or all of their cash incentives back. All that lead to was clients changing every 2 years as opposed to every 6 months.
This has meant that banks’ profit margins have shrunk leading them to reassess this strategy. While there seems to be some room to negotiate on the interest rates the most notable pricing difference is the offer of significantly less cash backs.
We knew that unless the banks took a united front, this practice was not going to change. If one bank would make a stand and offer a conservative pricing the client would simply take their loan to another to get a better pricing. But now with this united front the message on pricing is clear, concise and more realistic not to mention sustainable.
What this now means to the consumer is that they won’t see those crazy pricings. What could have been offered even up to a month ago is now no longer on the table. Clients will have to readjust their expectations in regards to the pricing they will get for their loans. But what this means to the consumer and indeed the country is that the financial strength of the banks will continue to grow and as such be able to offer more choice in regards to who people can go with and what banks will ultimately be able to offer them. As brokers we see this as a great move to stabilising the markets and providing more choice to clients.
