Professor Kevin Davis, Research Director at the Australian Centre for Financial Studies proposes that it is time to re-think and re-design the way Australia does mortgages.
Australian housing mortgage contracts have a somewhat unique characteristic. Australian homebuyers sign a mortgage contract with banks which gives banks the right to change the loan interest rate whenever and to whatever they want.
This flexibility given to banks is of considerable value to them, but exposes borrowers to risks to which they arguably should not be exposed. If a bank faces an increase in its funding costs, this can be passed on to existing borrowers. That applies regardless of whether the increase in funding costs is something which affects all banks or only an individual bank – although competition may impose some constraints in that latter case.
This paper was prepared by Professor Kevin Davis, Research Director of the Australian Centre for Financial Studies.
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