Expectations on Pricing on Loan Applications

21 September 2016
Up until a few months ago the pricings on new lending was, to say the least, getting out of hand.  Lenders were offering huge cash contributions, reduced interest rates and other incentives to entice borrowers to take out loans with them.  While pricing is still very competitive it should be noted that what was offered previously was never going to be sustainable.
Advertised interest rates are the lowest they’ve ever been yet borrowers still have the expectation that there will be further discounts.  However with the lending rates so low, banks are forced to offer very low investment rates meaning Investors are not enticed to deposit their funds in to the banks and are looking for other investments offering better returns.  The banks need the Investors to invest with them so they can lend these funds out to Borrowers.  If they don’t have the funds from investments then they need to source their funds from overseas which attracts higher costs.  As a result the margins from Investing to lending are shrinking meaning further discounts on the lower interest rates are not cost effective.  
Often differences in the discounts on interest rates are not significant enough to offer any real advantage from one lender over the other so it is imperative that clients know what that difference in costs actually are to be able to make an informed decision.
Cash contributions from Lenders was the one area that has set the expectation of clients, changing the landscape on the pricing front.  Previously lenders were offering thousands to entice borrowers to go with them.  It even got to the stage that clients expected cash contributions to stay with their own bank.  It was often “cheaper” for clients to change lender because of the cash contributions offered by new lender leading to a practice of clients jumping from one lender to another.  Lenders now appreciate that this was not a sustainable framework and we have seen a big reduction in the cash contributions on offer by lenders.  
When choosing lenders it’s important to consider all aspects of what that organisation has to offer and while this does include pricing often the pricing is the last consideration.  The financial stability of the organisation, the ease in dealing with that organisation, the products on offer, the features and flexibility of these products and the organisation itself should all be considered as much if not more than just the pricing 
While it is difficult to feel sympathy for any large Banking organisations we need to remember they aren’t a charity, they are a business.  We need them to be profitable because if they are profitable they will remain in business.  If they are not they will withdraw from the market.  The more profitable they are the more options that borrowers have available to them not only now but in the future.   

Published In Whakatane Beacon

This post was written by

Trish Marsden - who has written 96 posts

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