So the main three players on the Australian mortgage market struggle to obtain larger market shares in the context of increasing the demand for loans. They make use of important loan discounts (which refer to decreasing the commissions/fees / and the interest rate for the mortgages), offer grace periods, and in some cases reduce the level of the documentation that has to be provided for the loan granting procedure. This competition has led to a descending trend for the interest rates (around 7-7.5% in 2003), which mean for the financial institutions additional costs. Besides the usual expenditures with implementing an electronic customer-financial institution interface, as to keep-up with the market tendencies, a financial institution must face the issue of decreasing interest rates and offering more benefits to the customer, in order to attract and retain profitable customers (with a certain level of income, performing repeated loan acquisitions during a certain period of time).
The perfect word to describe the Australian mortgage loan market could be dynamism. Every financial entity is trying to attract as many customers as possible. But what should be the most appropriate marketing strategy to do so? Looking at the demographic situation for Australia, the statisticians observed the aging trend, also noticeable at a global level. It should be indicated that estimations for 2051 are quite gloomy, as more than 30% of the population will be over 65 years of age. What is more interesting is that 6-9% will be over 80 years old. One of the strategies a bank or non-banking institution may use to try to retain the existent customers, under the market stagnation conditions forecasts for the next years, and also explained by a surge in the property prices. This desiderate could be achieved by company take-overs and mergers, so that important financial conglomerates may consolidate, and better perform on the market. These financial empires would be able to permit lower commissions, due to increased internal and external economies of scale.
Reverse mortgage - financial product adapted to the demographics situation
Financial institutions want to rip as many benefits as possible from the market. Taking advantage on the aging situation that is about to spread out in Australia, some players developed special mortgages loans for the elder persons, over 65 years of age. The mechanism, indeed very simple in substance poses many barriers for public acceptance of this special product designed for a particular market segment, which if the previsions for 2050 hold, would account for 30% of the total market. So, the mechanism can be put under the following terms -the beneficiary is granted a loan, the financial warrantee being his real-estate property. The loan can be offered after the loan agreement is closed in full amount, or can be received by the beneficiary in equal annuities. The beneficiary does not have to reimburse the mortgage loan until it reaches a specific age, stipulated in the contract or after his death. The asset changes ownership, a transfer of property rights is sent to the bank in the detriment of the beneficiary of the loan. This financial product aims to offer support for the elderly, which may need funds for medication, taking vacations around the globe, or other products and services specific for the elderly, but not limited to those. This agreement is very beneficial if the elder person does not have any heir or successors who may want to get the property after his death. Risks involved by this product are high especially for the financial institution if the assessment of the asset is not made in a satisfactory manner. If the value of the property is undervalued, the bank may run into a deficit and incur a lost.
The Australian mortgage market is nowadays a very competitive and fragmented. However, if the prospects of the analysts come into reality, the market could soon stagnate due to increase in property prices and the social phenomena of population aging. As a result, the battle for customers will move to the elder persons, who will become the centre of the market strategies for many financial institutions.
1) Delloite Report on the Australian mortgage market, in 2005 'Australian morgtage market at a crossroad' http://www.deloitte.com/dtt/cda/doc/content/Australian%20Mortgage%20Industry%20Report.pdf
Delloite Report on the Australian mortgage market, in 2005 'Australian morgtage market at a crossroad' http://www.deloitte.com/dtt/cda/doc/content/Australian%20Mortgage%20Industry%20Report.pdf