Interest Rates and the Two Step Tango!
by Jon Mardell November 10, 2010
It has been an interesting couple of weeks in the Australian Home Loan market, many events have transpired and it is hard to know where to start! What I will cover here today is the Reserve Bank of Australia making an unexpected move in interest rates on Melbourne Cup day and the aftermath that has since consumed our television sets, newspapers and bloggers from around the web.
Carrying on with this great Australian tradition, we all expected to lose some pocket change when we went in for a flutter on the Melbourne Cup but not many of us expected to come out with even lighter pockets! As the punters did their doe on the race favourite which eventually saw Americain streak across the line the Reserve Bank of Australia made the shock announcement to increase the official cash rate by 25 basis points to 4.75%. This alone was enough for home owner’s hearts to miss a beat but was triumphantly dwarfed by the Commonwealth Bank adding another 20 basis points to the rise and increasing their customer’s rates by 45 basis points. The aftermath in the week following this announcement saw the other major banks running scared and delaying their announcements on increases to their customer’s interest rates deciding to wait for the heat to be turned down leaving the Commonwealth Bank hung out to dry alone.
I do not agree with the size of the Commonwealth Banks increase but i think the condemnation they received from the media and both sides of Government should have been directed to all the major banks and not just the Commonwealth Bank. The major banks have been indicating for some time that their margins were reducing because of the increase in funding costs which will continue for the next couple of years. Over the last couple of weeks we have seen the well-oiled two step tango out of sync as this dance of who is going to be the first bank to make the announcement see the Commonwealth Bank left out to dry as the other banks ran for cover because of the public backlash. I am sure the other majors are busy gauging market reaction and number crunching to determine their move as the droves of customers leaving the Commonwealth Bank have to go somewhere and they might be thinking if they play their cards right it could be to them!
So how are banks making super profits when their margins are smaller? It is simple, it comes down competition. The majors post GFC have seen a reduction in competition and they have successfully increased their market share dramatically creating this oligopoly we see today! The Government and opposition have been quick to jump on the populism bandwagon and come up with a range of ideas, some farfetched and some with some major credibility.
Based on what is being splashed around the papers most people would be lead to believe that outlawing exit fees will be the saviour to home loan customer’s problems but i am not sure on this. All you have to do is compare the exit fees across all the major banks and the smaller lenders and what we come up with is the major banks exit fees are actually lower than the so called “competition”. (See for yourself in our Home Loan Comparison Calculator ) If the government outlaws exit fees on home loans than these smaller lenders or the “competition” are going to have to recover the money from somewhere and unfortunately it is going come from their customers home loan interest rates! If the “competition” is then unable to compete on an interest rate level with the major banks then we will have even less competition then we do now!
This is just some food for thought, but if you want to see how the increase in interest rates compare across the major banks and smaller lenders use our Home Loan Comparison Calculator. Coming up next will be some analysis on ING Directs recent announcement of giving $1000 cash to new customers and how it compares to other lenders offerings.
