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No government guarantee to shake up home loan market

No government guarantee to shake up home loan market

Jack Han investigates the home loan market after the government guarantee ends.

February 15, 2010

The Australian Government is taking away the home loan guarantee that supported lenders during the global financial crisis, in an effort to urge the economy towards independent recovery. However, home buyers will have more to consider when they apply for home loans, because their mortgages will no longer be backed by public funds.

The guarantee, which ends on March 31, allows smaller institutions to lend with confidence, and ensured that they remained competitive against large banks and international rivals alike. In total, the guarantee helped smaller lenders raise $32 billion worth of capital in international credit markets during the financial crisis.

Treasurer Wayne Swan believes that if the guarantee was not introduced, the home loans market would be much tougher for borrowers.

“Without the guarantee, our banks would have lent less and interest rates for borrowers would have been far higher,” Swan recently told the ABC.

Treasurer Swan has warned banks that any retaliation in the form of interest rate increases above Reserve Bank cash rate movements will not be tolerated. “…They would incur the wrath not just of the Australian people but of the Australian Government.”

The removal of the guarantee is not unexpected, as it follows the abolition of similar government guarantees in the US, France, Canada and South Korea. Britain, Germany, Ireland, Denmark, Sweden, and Spain are expected to follow the trend later in the year.

Banks have supported the government decision to remove the guarantee, even though many smaller mortgage lenders are still currently using the guarantee to overcome lower credit ratings and raise funds in domestic and international markets.

The government has kept the deposit guarantee on savings accounts under $1 million until next year for reviewal.

For most Australians, the end of the guarantee will not have a dramatic effect on their borrowing habits. But for those considering smaller lenders, it may become harder to secure loans unsupported by the guarantee.

The good news is that this move may increase competition in the market, and borrowers will continue to see attractive offers from smaller lenders in a bid to win back market share. To take advantage of these deals, it will be up to every individual to compare home loans online and find the cheapest rates for themselves.

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