The following is a submission to the Senate Inquiry into The Worsening Rental Crisis in Australia.
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This submission addresses the term of reference,
“actions that governments can take to reduce rents or limit rent rises”
The submission outlines a vision that only governments can realise with the cooperation and leadership of the Reserve Bank.
A Vision
The Reserve Bank, in cooperation with the Federal Government, Treasury, ASIC, APRA, and the ATO, can persuade Banks to increase the financial productivity of home loans. Financial productivity means it costs less to repay a loan with a given interest rate. The savings from the productivity gain is given to the borrower, allowing lending Banks to send the following notice to home loan borrowers without dropping the Bank’s immediate profitability.
Notice to Home Loan Borrowers
Currently, to address inflation, the Reserve Bank increases interest rates. Instead of changing the interest rate, the Reserve Bank could request banks to share the interest between the Bank and the Borrower. With most loans today, the Bank keeps 100% of the interest the Borrower pays. With sharing, the Bank collects the interest and gives some back by reducing the amount still owed.
For example, assume a $10,000 loan repayment of $200 removed $100 from the amount owing and paid $100 of interest, then the amount owing drops by $100 to $9,900. To share 50% of the interest, the amount owing would drop a further $50 to $9,850. This decreases the time to pay off the loan. Sharing keeps the interest fixed but shares the interest between the bank and the borrower.
Banks could implement 50% interest sharing and send the above “Notice to Home Loan Borrowers” to control inflation as a coordinated activity monitored by the Reserve Bank.
