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Fixed rates position banks for the cross sell

A former mortgage manager believes locking in borrowers for five years with a fixed-rate mortgage buys lenders more time to sell them insurance and wealth products.

Over the past month fixed-rate home loan prices have dropped below the five per cent mark as lenders compete for market share.

Until now this has been put down to cheaper funding, but former National Finance Club owner Andrew Clouston believes a more astute strategy lies behind the fixed-rate frenzy.

“It is a very competitive market at the moment,” Mr Clouston said.

“In that market you are always going to get people or institutions that are trying to grab their market share,” he said.

“The good thing about doing that with fixed rates is you get to secure a customer for a reasonably secure period of time.

“That is why I believe you are seeing such good pricing in the five-year markets, because that does secure a customer relationship for a long period of time and most institutions now are very motivated to develop customers, particularly new customers, to bank into multi-product customers.”

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The trend among borrowers has traditionally been to float rates, but recent reports suggest fixed-rate mortgages are gaining momentum.

Bendigo and Adelaide Bank has seen the proportion of its variable home loans drop and the number of fixed-rate loans increase in the 12 months to June 30. Variable loans now represent 70 per cent of the regional bank’s loan book, down from 79 per cent in 2012/2013, while fixed loans increased from 21 to 30 per cent.

Mr Clouston said lenders will be weighing up the potential gains of retaining borrowers over a three to five year period. 

“I am sure it is a key driver when you look at taking what might be a temporary hit on your margin in an environment where people are actively looking for better rates because there are better rates out there, you need to have some upside on it, and the upside on it if you can attract new customers to your institution is it gives you that opportunity to sell other products to those customers,” he said.

As banks continue to bolster their wealth management platforms, Mr Clouston expects fixed-rate customers will be targeted for new product offerings.

“We know now that all the major banks have all got quite robust wealth management platforms now with regards to financial advice, and there are quite few with significant insurance offerings,” he said.

“There is quite a bit of additional product that, with a long-term relationship with the customer, they have the opportunity to embed into those customers and therefore secure the relationship for even longer than that three to five-year fixed period.”


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