What is a public RMBS? - Mortgage DomayneSkip to main content

What is a public RMBS?

March 30, 2024

During the week, The House Standing Committee on Economics has released its Better Competition, Better Prices, putting forward a range of recommendations on mortgages. The Better Competition, Better Prices report puts forward 44 recommendations to the government, including –

  • A requirement for banks to notify customers of the base interest rate at the end of an introduction period when a deposit product is offered.
  • A requirement for banks to alert customers when they are reaching the threshold for eligibility for a bonus interest rate

The idea of “tracker mortgages’ was also floated, which are mortgages designed to automatically change with the cash rate at an agreed margin and protect borrowers from paying over the odds on their mortgages due to interest rate drift.

In this week’s newsletter, we look at another recommendation which could revolutionise the lender market in Australia, as it has already done in Canada – a public Residential Mortgage-Backed Security (RMBS) scheme.

A public Residential Mortgage-Backed Security (RMBS) is a financial instrument representing a bundle of home loans that are sold to investors. These securities are backed by the cash flows generated by the mortgage payments of the underlying borrowers. In essence, when a homeowner makes their mortgage payment, a portion of that payment goes towards the investors who hold the RMBS.

For mortgage borrowers in Australia, a public RMBS can offer several benefits. Firstly, they provide liquidity to mortgage lenders, allowing them to issue more loans. This increased liquidity often translates into more competitive interest rates and loan terms for borrowers. Additionally, by offloading mortgages onto the secondary market through RMBS issuance, lenders can free up capital to issue new loans, stimulating further lending activity in the housing market.

Furthermore, a public RMBS can lead to greater diversification of funding sources for mortgage lenders. Instead of relying solely on deposits or wholesale funding, lenders can tap into the capital markets through RMBS issuance. This diversification can enhance financial stability by reducing reliance on any single funding source and mitigating risks associated with funding mismatches.

Another benefit for mortgage borrowers is increased transparency and standardisation in the mortgage market. RMBS transactions often require lenders to disclose detailed information about the underlying mortgages, including their performance and risk characteristics. This transparency can lead to better-informed investors, which in turn can promote responsible lending practices and ultimately benefit borrowers by ensuring they have access to loans that are suitable and affordable.

Overall, a public RMBS could play a crucial role in the Australian mortgage market by providing liquidity, diversification of funding, transparency, and potentially lower borrowing costs for homeowners.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.

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