Down the Yellow Brick Road - or up the garden path?

Yellow Brick Road and Macquarie Bank plan to offer mortgages against the Big Four banks - but the market will need a lot more information than so far released. Sam Howzit/Flickr

Wealth management company Yellow Brick Road and Macquarie Bank have foreshadowed some sort of relationship which will provide a “much-needed alternative for Australian consumers” with the first step being a new mortgage product.

Challenges to the big four banks’ dominance of the mortgage market are welcome (even though this writer has shares in those banks, and also in Macquarie). But there is a lot more information needed before the positive spike in YBR’s share price following the announcement could be seen as warranted.

While, as an academic researcher I do not believe it appropriate to generally comment on business strategies of specific companies, I don’t think my social conscience can let this one pass.

Take the following description in YBR’s two page announcement to the Australian Securities Exchange. It reads:

“Yellow Brick Road’s opening move is a 1.15% discount off the base rate of 6.65% for the first 12 months on residential home loan products.

After that, a discount off the base rate of up to 0.86% is guaranteed for the life of the loan… All successful applicants will get the discounted rate irrespective of their status.”

Now, it may just be a drafting error, but “up to 0.86%” is not the same as “of 0.86%”. “Up to” could include zero! But even more relevant is the question of how the base rate is determined.

It may be 6.65% today, but what will it be in a year’s time? A quick search of the YBR website provided no information to answer this question - even among the list of FAQs provided. A discount on a base rate which might exceed the standard rates offered by other lenders would be a “Clayton’s discount” (for those who can remember the ads for “the drink you have when you’re not having a drink”).

Now, it maybe that the tie-up between YBR and Macquarie will enable funds to be raised at a rate to finance mortgages which means that the YBR base rate is competitive with loan rates of the Big Four and other lenders - although how is not clear. But more fundamental (or maybe it’s semantic) is the issue of what is meant by a base rate which no one pays? All successful applicants, it is stated, get the discounted rate.

I can imagine the possibility that a relationship between a wealth management company such as YBR and Macquarie Bank could yield potential economies and efficiencies. And I look forward to more information to assess that.

But a two page news release with the sort of information contained is really no news at all - even if it was listed on the ASX announcements as being a “price sensitive” announcement.“