Yellow Brick Road/Macquarie deal - bad news for high LVR borrowers?

In 'Coming up: A hard lesson in refinancing risk?' I highlighted a potential threat to borrowers with high loan to valuation ratios (LVRs). Yesterday's announcement of a deal between Yellow Brick Road (YBR) and Macquarie, to take on the Big 4 banks in the home mortgage market, again raised the issue.

YBR offer to 'smash your home loan' but they don't smash it quite as hard if your LVR is more than 80% (rates are 0.05% higher). 0.05% probably isn't going to break anybody but it's another sign of LVR feeding into the price charged for home debt - not good for highly leveraged borrowers and probably not great for the property market either.

To be honest it's not obvious to me why Macquarie has chosen now to jump back into the Australian mortgage market. Mortgage rates are low and bank margins have been squeezed.

But I wonder whether 'cherry picking' higher quality loans might be part of the strategy? Loan growth has slowed in recent years making it tougher for the banks to show exceptional profit growth. Cost control has become an important part of the equation. Building up a higher quality loan book, and using it to borrower at cheaper rates, would be a pretty good way to keep costs down.

I have been waiting for the Big 4 banks to compete more ferociously for the low-LVR customer, whilst gradually turning the screws on those with high-LVRs through the variable interest rate mechanism. Perhaps the arrival of YBR/Macquarie on the scene will force the issue?

Wayne Swan has been keen to see more competition in the Australian banking industry. Apparently, thirty banks just isn't enough. But he may not end up liking the end result of what he wished for.

In the background to increased banking competition, we have Genworth trying unsuccessfully to sell down their Australian mortgage insurance business. It doesn't seem as though we have a long queue of people eager to take the risk on 90-95% LVR mortgages.

Competition may well help those with low-LVRs, but if these customers start getting pilfered from the Big 4, then the banks are going to be left with no choice but to seek more interest from the high-LVR crowd. And, as I pointed out in the previous post, our weird self-determined variable interest rate system let's them do, well, whatever they want.