YBR and Macquarie Bank democratising mortgages

In a week in which the ‘people’s choice’ was re-elected as the President of the United States, I was lucky to be associated with an Australian move to democratise mortgages.

Many readers would have seen the stories in the media about the fact that my business – Yellow Brick Road – and Macquarie Bank have come together to market a more affordable mortgage product to everyday Australians.

These mortgages will be offered at a 1.15 percentage point discount on our base variable rate loan in the first year, reverting to up to a 0.86 percentage point discount for the life of the loan.

In the first year these mortgages will have interest rates of around 5.5%.

The big four banks’ standard variable rate mortgages have an average interest rate of around 6.62%, so you’re probably wondering how an organisation like Yellow Brick Road can market its own mortgage for 5.5%.

The answer lies in the difference between a risk premium and a customer discount.

That is, in Australia we can accept that someone who is wealthy will get a discount from the bank on their mortgage rate. But what Australians will not accept is that they pay more than their neighbour because they are perceived as being riskier.

So the banks do something very clever: they place the higher risk premium on all of their standard variable rate loans.

Then the banks offer "professional packages" to customers they perceive will use more services with the bank and add to profitability, so they drop the mortgage rate from 6.62% to 5.9% for their high net-worth customers who borrow more.

Proof that this works can be seen in the fact that all the big banks do it.

We’ve turned that idea around, and democratised the mortgage discount. Rather than customers waiting to be selected for a lower rate, we tell everyone they can have the lower rate, which after the first year, will be set at a similar level to the banks ‘pro pack’ mortgages.