Fixed-margin mortgage products an increasing option

David Walker
Fixed-margin mortgages have got the backing of Kevin Davis, research director of the Australian Centre for Financial Studies.

In a statement on Friday, Davis said the recent debate over mortgage margins had shown that Australia's "internationally anomalous" mortgage design was creating problems.

Banking Day reported last month that the Australian Bankers Association was considering whether to embrace a proposal to offer some fixed-margin home loan products.

In the last parliament, the Greens introduced legislation that would require the banks to offer such loans.

Professor Davis said banks should introduce mortgages "in which the interest rate is tied at some fixed margin (set at the outset of the loan) over a relevant indicator lending rate".

In the standard Australian variable rate mortgage loan, he said, "borrowers place themselves at the mercy of lenders with regard to future interest rates they will have to pay".

"Foreigners find this truly amazing, being more used to either fixed rate or adjustable (indicator-linked) rate loans."

The existing Australian mortgage structure made banks' jobs much easier, Professor Davis said. Banks passed on to customers not only movements in market interest rates, but also the consequences and risks of any errors they made in their funding and interest rate risk management choices.

Professor Davis said banks offering fixed-margin loans would have to deal with these risks in fixing the margin for very long periods. Banks would also have to choose the most appropriate indicator rate, which could be either the cash rate or a wholesale market rate such as the bank bill swap rate.