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Federal Goverment Home loans give banks a run for their money

THE Federal Government will enter the home loan business by investing $4 billion to revive the non-bank mortgage market and boost competition.

The aim of the unprecedented action is to give borrowers more options than the five major banks now dominating the market.

This could start a price war, which the Government hopes will keep interest rates low and stimulate the flat housing market.

And the move could stop banks refusing to pass on an official rate cut expected to be announced by the Reserve Bank in two weeks.

Mr Swan revealed the Australian Office of Financial Management (AOFM) would buy mortgage-backed securities from smaller lenders, non-banks and building societies.

There would be two tranches of $2 billion each, possibly more.

Part of the money would come from the 2007-08 Budget surplus, which came in $2.9 billion higher than expected at $19.7 billion.

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