Are we going to end up with two levels of mortgages in Australia? That is, one lot funded by bank deposits charging one interest rate, and another lot funded by the global financial markets, where interest rates have just gone up – if you can get funds at all (and RAMS Home Loans said today that it is having trouble in that regard).

Well, there have been two different types of mortgages for quite a while, but the question is whether the interest rates are going to be different now, and I’d be surprised if they were. It’s true that the cost of funds is going to be different for each of the types of lenders, but that’s also been true for a while.

What’s been happening is that the banks that source their funds from deposits, and lend off the balance sheets, their cost of funds is decided by the Reserve Bank when they set the official cash rate. That’s been going up, as we know.

But for the other lenders who source their funds from the international markets, their cost of funds has not been going up, in fact the cost has been held down by the boom in US credit markets, yet they’ve been putting up their interest rates with the banks, and getting a free ride.

So what we might find now is that because of the cost of funds going up in the international markets, the lenders who use that as the source of funds will find that their rates will start to go up, as we’ve already started to see, and the banks will get a free ride, because they’re sourcing their funds from deposits. It depends a bit on what the Reserve Bank does.

But if there’s a real problem in international markets, it’d be unlikely that the Reserve Bank would keep putting up interest rates to crunch the economy, when it’s already kind of being crunched by a lack of confidence and a sharemarket downturn.

Most forecasters are still talking about the Reserve Bank putting up rates, but I would say that if there’s a serious, long-term problem in the international market, then that’ll come to a very quick end.

The Norwegian Central Bank put up rates last night, so it’s clearly not too worried at this stage, but a lot of the commentary talked about it being a bit reckless. Perhaps even courageous.

The market’s clearly in trouble, and consumer sentiment in the US is in decline, so the US economy probably will slow quite a lot, whether it’ll go into a recession or not, who knows … but I think Central Banks who put up rates now, anywhere in the world, are acting courageously.

The Australian lending market has become more competitive over the years, but whether or not it opens up now a two-tier system, where there are two levels of interest rates, will depend really on how competitive the banks want to be: do the banks now want to take this opportunity to send outfits like RAMS, and Aussie Home Loans and Wizard and so on, out of business, or at least take some of their marketshare back?

Depending on what the Reserve Bank does, the bank’s cost of funds could remain lower than the cost of funds for those who securitise their loans on the international markets, and if that occurs, then the banks will be in a stronger competitive position. So it’ll just depend then, do they decide to use that position to make more profits, or to take more marketshare off the other lenders?

It’s impossible to know what might happen. My sense would be that they’ll use it to make more profits, but it would only take one of the banks to say, righto, this is a great chance, let’s get some marketshare back.

Some of the banks, smaller banks in particular, source their funds from both places, from both deposits and securitised mortgages on the international markets, Bendigo, Adelaide Bank, ANZ does a fair bit of it, and so on, so it’s not quite as clear cut as banks and non-banks.

The only one that’s moved so far is Bluestone. It’s Australia’s sub-prime lender, it lends to riskier prospects mostly, and therefore it’s not that surprising that it would put up its rates in the way that it has.

So none of the others have moved yet, and they might not, because firms like RAMS would be worried about losing their market share to the banks, which is presumably why RAMS is talking about profits being squeezed, rather than interest rates going up, because it knows if it puts up rates, its own rates, out of line with everyone else, then it will suffer a real marketshare loss.