Major banks are finding their ways to keep mortgage rates above the RBA’s interest cycle and regain their margins as funding costs increase.
While major banks passed on the two interest rate cuts in November and December to home loan customers, the end of promotional discount offers established in mid-2011 means that average interest rates on new variable loans have actually reduced by less than the cash rate, says the Reserve Bank.
Overall, average interest rates on all outstanding home loans have fallen by 44 basis points since October 31, compared to the RBA’s official cash interest rate cuts of 50 basis points over November and December.
However, this is not enough for some banks, who have moved to raise their interest rates after the Reserve Bank failed to produce the expected cut this month.
ANZ has raised its mortgage rates independently of the Reserve Bank by 6 basis points to 7.36%, having already begun the process of downsizing its staff. Major mortgage lender Westpac has followed suit by raising its standard variable rate by 10 basis points to 7.46%, effective from 20th February.
The smaller incremental raises are presumably designed to keep shareholders happy while avoiding clamour from customers and politicians. ANZ has calculated that the rate rise adds $6.50 per fortnight to an average home loans of $280,000.
To analysts, banks have as good as forced this move upon themselves. After the option of regaining margins via a Reserve Bank cut was scuppered by the Bank’s decision to keep rates on hold, banks have had to raise rates to uphold the credibility in their long-running complaints about higher funding costs.
ANZ’s chief executive, Philip Chronican, attributed the decision to intense pressure on banking margins.
"In December and January we absorbed the additional funding costs in the hope that funding pressures would ease and that no change in lending rates would be necessary.
"However, margins in retail and business banking have now been squeezed for a number of months and we've taken the difficult decision to pass on part of the higher costs to customers while we also get on with taking action to reshape the bank for tougher times."
Mr Chronican stressed the need for "safe, well-run commercial banks that aren’t a burden on taxpayers and that can continue to lend".
Treasurer Wayne Swan, who frequently locked horns with major banks at the end of 2011, described customers as ‘ropable’, adding that the new legislation introduced last year makes it easier for consumers to get a better deal. “We do need profitable banks, but what we need here is competition,” he said.
Are banks right to raise their rates? Do their record profits justify it? Will you consider switching your home-loan supplier? Let us know at Which4U!
