Banks sacrificing profit for mortgage holder growth

The mortgage discount war being waged between the major banks is reaching a point where it is starting to eat into their bottom lines, according to a banking analyst.

JP Morgan analyst Scott Manning says the average discounts offered on standard variable mortgage rates has jumped from 0.7% to 0.9% over the past 12 months.

According to Manning, mortgages discounted by 0.9% are not profitable if sold through a mortgage broker and loss making above a discount of 1.2% if sold through a branch.

Banks pay brokers upfront commissions of about 0.5% of the loan amount and monthly trail payments of around 0.15%.

Mortgage brokers recommend about a third of all loans written by the major banks with the CBA the most dominant player in the broker space, accounting for 32% of all third-party loans, according to August analysis by mortgage software group Stargate.

“We estimate that current pricing is about as competitive as it can get prior to diluting group returns,” Manning says in a note to clients.

Commonwealth Bank is offering new clients who take out loans through an accredited mortgage broker discounts off 1.02% off its advertised standard variable rate provided they pay a deposit of 20% and borrow more than $500,000 the Australian Financial Review reports.

The discount takes CBA’s effective mortgage rate to 6.79% matching that of NAB’s UBank offer.

The battle for mortgage business is being led by CBA, which is offering to beat the advertised mortgage rate of its big four competitors for the month of September.

The bank is looking to regain market share lost to NAB and ANZ since the start of 2010.