Can a ‘People’s Bank’ really help Aussie home loan borrowers break into the property market?

Thursday 05 April 2018

Article by Kelly Emmerton

Greens Senator Richard Di Natale has proposed that the Reserve Bank begin lending as a ‘People’s Bank’, offering Aussie home buyers loans of up to 60% of their property’s value, in order to ramp up competition in the loans space and help buyers get into the market.

Can a ‘People’s Bank’ really help Aussie home loan borrowers break into the property market?

Under the proposal, the People’s Bank would offer a basic, ‘mortgage tracker’ home loan, with a minimum interest rate of approximately 3.5% - equal to the neutral cash rate the RBA previously flagged as its goal.

According to Di Natale’s speech notes, the interest rate would rise with the official cash rate, but would “always deliver loans that householders can pay off faster, and with significant savings on interest, compared to the current offerings of the big banks.”

The scheme is designed to promote competition in the home loans market, to help new borrowers enter the market and help borrowers pay off their home loans quicker, while saving money.

Di Natale gave the example of a couple buying a $600,000 home. Under the proposal they would be able to borrow $360,000 from the People’s Bank, at 3.5% interest.

Assuming they had saved up a 20% deposit, they would then need to borrow $120,000 from a commercial lender. If they wound up with the average big bank rate of 4.64%, Mozo’s home loan calculator shows the total interest for buying their home over a 30 year period would be $324,458.

Had they borrowed the entire amount from a commercial lender at 4.64% with a 20% deposit, the total interest charged would add up to $409,985. On the other hand, if the couple had compared home loans and scored the lowest variable rate in the Mozo database at the moment - 3.39% from both Reduce and BIDeloan - they would pay only $285,378 in interest.

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While the People’s Bank is meant as a solution to Australia’s housing affordability crisis, most responses to the proposal have been skeptical at best, with some economists saying the plan was likely to make things worse for borrowers. Labor leader Bill Shorten described the idea as a “thought bubble.”

“The real answer here isn't to put more cheap cash into the market, which will actually just boost the cost of housing," he said.

Mozo Data Manager Peter Marshall was also largely critical of the idea, saying that while it was a nice thought, the ‘People’s Bank’ was likely to backfire.

“Practically speaking, I don’t see how this idea is going to play out in a beneficial way for borrowers. It seems far more likely that access to competitive home loans through the RBA will push buyer demand up, inflate house prices and make commercial loans more expensive - the opposite to what’s wanted,” he said.

Another problem arises from the fact that People’s Bank home loans would be available only for up to 60% of the property’s value - leaving borrowers to come up with a whopping deposit, or find another source of financing to bridge the gap.

“There aren’t a lot of first home buyers - or any home buyers for that matter - with a 40% deposit saved, particularly in areas like Sydney, where the most housing relief is needed,” said Marshall.

That means most borrowers would have to bridge the gap with a loan from a commercial lender, which is where they could get in trouble with high interest rates.

“Doing the work to compare home loans and find the best possible value for you is still the best way to make sure you’re not paying too much on your mortgage,” Marshall said.

We’ll have to wait and see if Di Natale can get his proposal over the line - in the meantime, if you’re looking to get into the property market, you can search and compare tonnes of low rate home loan options using our home loan comparison tool.

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