Monday, 12 November 2012

Yellow Brick Road's 1.15% discount is good...but not a game changer

There as a splash recently in both the financial and regular press about a 'fifth pillar' entering the Australian banking system.  The press lauded the entry of this competitor as great for consumers and finally providing some competition to the big four Australian banks.

Who is this new competitor?

The new competitor was Yellow Brick Road, a financial services company with 130 retail stores across Australia, which had recently struck a deal with Macquarie, an Australian based investment bank to use it's balance sheet to provide funding for Australians looking for home loans.  Their headline rate seems staggering - they are offering a 1.15% discount to the standard variable rate which is a discount rate almost unheard of in the Australian banking environment.

Yellow Brick Road is a company founded by Mark Bouris, the host of Australian's version of The Apprentice.  He was also the founder of Wizard Home Loans, a mortgage provider he later sold to GE Money for A$500 million.  With Macquarie's balance sheet backing him this venture is unlikely to be a 'here today, gone tomorrow' type operation so it should be something that those looking for a loan should consider.

However there are risks of a new competitor like this which you need to consider BEFORE you refinance you loan with them

Although the deal seems great, there are actually several draw backs and 'false' comparisons which many hyping this product have failed to point out.  These include

  • The 1.15% discount is for the first year only.  This then reverts to a 0.86% discount.
    • Generally promotional or 'sweet heart' rates are targeted at those who only look at the first year and do not consider what rate they are likely to be paying later on.  Given that home loans last for 20 to 30 years, it is the 'normalised' rate that you should be considering - not the sweetheart rate
    • To be fair to Yellow Brick Road - they do provide what the rate will be over the life of the loan on their comparison table
  • The comparison table is flawed - ALL banks offer significant discounts if you ask for it
    • The standard discount on a loan of more than $250,000 is 0.70%.  This table does not take into account this discount
    • For example they have the NAB rate at 6.08% however I am only paying 5.91% on my loan (which is not very different to the 5.79% offered by YBR)
  • Although you get a discount to the Standard Variable Rate (SVR), you do not know whether YBR will reprice their SVR to a rate higher than the other major banks
    • There is no 'standard SVR' - banks can make this whatever they like
    • Over time you can see that the major banks track their SVR's relatively close to each other however there is no such proof for a new competitor.  If they want to increase their profits they can increase this SVR to a point where they are actually charging you more than the major banks even if your discount is larger
  • There are no ongoing fees BUT this is a very basic product so you do not get many of the bells and whistles that are standard on other banking products
    • Banks often charge a 'package fee' for the loan that they provide.  Mine is $120 p.a. and for that I get an offset account linked to me loan, fee-free credit cards and discounts on significant other products
    • The YBR does not charge the fee but you have NO option to have an offset account, they do not offer fee free credit cards or any of the other benefits that come with having a 'package deal'
    • For me, the offset account is one of the most critical tools that I have in managing my finances so personally this is what killed the idea for me straight away
  • As this is a basic product you should compare apples with apples
    • As mentioned above YBR's comparison table compares it against the major banks and their standard home loans.  
    • However this is a rather basic product (which is fine - this is what some people what) - but what that means is that you should compare the pricing to other basic products
    • If you compare UBank (a division of NAB) then you see that YBR's rates are exactly the same as UBank (YBR is actually higher in the first year) - it is still a great deal - but it is not any better than what is already out there

If Macquarie sticks by Yellow Brick Road, it looks like there will be one more effective competitor in the Australian mortgage market which is great for consumers.  The deal they are offering is competitive for consumers but does not blow the lights out for what it is offering - it is in line with products already in the market.

The biggest benefit to consumers is actually for those who would not normally qualify for the discounts being offered by the major banks (i.e. anyone borrowing less than $250,000).  However given the 'normal' amount that most people borrow for their home loans this will not be a huge segment of the market.

Overall it is good to see competition in the market but you need to consider all the pros and cons before going for this product.  The pros are very clear and highlighted in all the advertising.  Hopefully I have given you pause to think about some of the cons in this post.

You May Also Be Interested In:


  1. Great insight, highlighting a lot of the flaws.
    Out of interest have you heard much about the smarter money product offered by YBR? This is an investment product offered by the group.
    An interesting post could be types of finananing i.e. big 4 banks vs credit unions vs smaller financial institution.

    I am looking at buying myself & financing will be a big one for the next 12 months for me. A friend uses qantas staff credit union (as he has a relative working for them). He can have a non staff member sign up, will be interested to see what the T & C's are for this lender

    1. Hi JM,

      Apologies for the delayed reply. I have not looked into the smarter money product being offered by YBR. I just had a quick look at it and it looks like a fixed income fund offering. When you compare it therefore you should not be comparing it to term deposits but rather to other fixed income funds. I will try and do a post on this in the new year!

      I have never actually looked at credit unions as an option. What you want to look at is the rate they are offering you and compare it to the actual rate you would be paying at a major bank (not the headline rate which strangely enough is actually higher).

      Also look at how their SVR moves over time compared with the major bank rates. One of the dangers of looking at the spot rate is that the bank or credit union you are at has temporarily decreased their SVR to make their deal look better than the competition.

      I would be really interested to see how you go!