Lender AMP defies the big banks on home loan rates

CASHED-UP AMP will cut its variable home loan rate by nearly 0.5 per cent tomorrow.

Craig Dunn, AMP Chief Executive, giving the full year profit results / James Croucher

AMP will defy the upward trend in interest rates and cut its variable home loan rate by nearly 0.5 per cent tomorrow.

In a clear sign that small lenders are recovering from a horror 18 months of being held afloat by taxpayers, the AMP will join the push to take on the big four banks on the interest-rate front.

The Federal Government has spent $12 billion keeping small banks, credit unions and building societies in business.

This is three times Treasurer Wayne Swan's initial estimate of $4 billion in September 2008.

Mr Swan told The Sunday Telegraph the Government continued to spend on small home lenders to keep pressure on the big four banks, which had capitalised on the financial crisis to snare the lion's share of the local mortgage market.

The four major banks now have 90 per cent of the trillion-dollar mortgage market - a 28 per cent increase between June 2008 and June 2009.

During the same period, the value of the remaining banks' home-loan portfolios dropped 40 per cent.

The Australian Prudential Regulation Authority will release the latest banking sector figures on Tuesday.

Credit unions and building societies have experienced a 20 per cent drop in home-loan interest income last year. Eleven credit unions went out of business or merged with others over the year.

AMP chief executive Craig Dunn revealed the AMP had benefited from $500 million in taxpayer funds, but the climate changed in January when a group of big investors gave AMP nearly a billion dollars to lend, with just a fraction contributed by taxpayers.

Large investors and - over the past 18 months - the Federal Government buy what are known as mortgage bonds from the smaller banks, which use the money to make new home loans.

Mr Dunn said he wanted to use the AMP's windfall to take on the big banks.

"For those customers looking for an alternative to the major banks, there is competition - of which AMP Banking is an example - but there needs to be more," he said.

Reserve Bank assistant governor Guy Debelle last week said there were "signs of life" in markets creating a better environment for small home lenders to access funds.

Mr Dunn said the taxpayer assistance had helped the AMP to keep down its costs, allowing it to take "much needed competition to the big four (banks)".

Mr Swan said the assistance was enabling smaller lenders to lend at competitive rates.

"This is helping to put more competitive pressure on the big banks and downward pressure on mortgage rates over time," Mr Swan said.

Opposition treasury spokesman Joe Hockey said AMP's rate cut was good news. He said: "It's worked or seems to have worked and that's good."