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BFCSA: CBA to mortgage brokers: Beat rivals by churning. Borrowers at risk

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CBA to mortgage brokers: Beat rivals by churning

Australian Financial Review Mar 26 2017 5:17 PM

Duncan Hughes


Commonwealth Bank of Australia is encouraging brokers to churn mortgages rather than lose borrowers to competitors who are offering hot incentives to switch lenders, analysis of offers reveals.

It comes as new strategies from major and smaller lenders rapidly emerge in response to changing regulatory, funding and marketing pressures, according to bankers and market analysts.

CBA has written to brokers with clients concerned about rising rates to consider seven alternative strategies involving its existing product range.

"With the introduction of new reference [interest] rates for investment home loans and the change to rates for interest-only investment home loans, you may see an increase in customers wanting to switch product types or change their repayment type," the bank stated in a memo to mortgage brokers.

The memo went on to outline alternative loan products that it suggests brokers offer to skittish investor and owner-occupied housing customers to keep them on CBA's books.

Westpac and Australia and New Zealand Banking Group are providing incentives for brokers to poach rivals' clients by making it easier to switch, offering lower rates, cash incentives, or dropping establishment fees.

For example, Westpac is offering a $1250 refinance rebate for new owner-occupier or investment home loans with a minimum size of $150,000.

Martin North, principal of Digital Finance Analytics, said CBA's strategy of mortgage churn should reduce interest for borrowers and decrease bank regulatory capital requirements because older loans are attached to property which has since increased in value, making them less risky.

Other lenders, such as Pepper Group, a specialist residential mortgage and consumer lender, are overhauling their distribution and marketing strategies to fill gaps they believe are appearing in the market.  

For example, applicants with unlimited defaults will be considered by Pepper so long as they are linked to a specific credit event, such as divorce, job loss, or an illness.

Alternatively, at a time when most competitors are requiring bigger deposits it is considering up to 95 per cent loan-to-value ratio applications for owner-occupier and investor loans.

A spokeswoman for the lender said it has changed its marketing and distribution strategy but the credit policies remain the same.

Record RMBS issue

Pepper, which also provides white label products to third parties, last week issued a record $900 million in residential mortgage backed securities.

"Even at these record-breaking levels we can attract and retain a diverse pool of investors who see value in investing in residential mortgage backed securities," Pepper Group's chief executive Mike Culhane said about the strength of institutional demand.

Changing market strategies across the residential mortgage market reflect increasing strong demand for Melbourne and Sydney real estate, regulatory pressure to control investor lending, rising funding costs and need to maintain net interest margins.

CBA, the nation's largest mortgage provider, is overhauling the use of mortgage brokers, who have traditionally provided more than half of recommendations, in anticipation that volume-based incentives will be axed in response to Australian Securities and Investments Commission's proposed mortgage industry reforms.

The bank is believed to be focusing on quality of loan applicants, continuity of deal flow and value of customers, rather than sheer volume of loans, according to industry services. The imminent purchase of the outstanding 20 per cent take in Aussie Home Loans will boost capacity to monitor third parties.

It is also concentrating on better branch mortgage sales.


"Not only is this improvement important from a profitability perspective, we also believe it reduces risk given evidence of systemic mortgage misrepresentation, particularly via the broker channel," said UBS Securities analyst Jonathan Mott.

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