There has been a great deal of hype around how Australia’s banks are deviating from the historic norm of adjusting their mortgage rates in line with the Reserve Bank of Australia cash rate moves. Two weeks ago, when the RBA slashed the cash rate by 50 basis points and the Big 4 banks passed on only 37 basis points (on average), the public outcry went up a notch.
I can absolutely understand that there would be a reaction. Anyone with a mortgage is going to be very interested to know about changes to their cost of servicing that debt. What is a bit more difficult to understand are the attacks on the banks based on how much of the rate cut was (or wasn’t) passed on.
Take the example of the National Australia Bank as a case in point. NAB were heavily criticised for passing on only 32 basis points of the 50 basis point cut. What’s more important though is the fact that despite NAB providing the smallest portion of the rate cut amongst the Big 4, their standard variable mortgage rate remains the lowest at 6.99%. Sure, they passed on less of the rate cut in May but they were already providing loans at a more competitive variable rate which probably results in slimmer margins for them for the risk of lending money to an individual for a home loan.
The largest portion of the rate cut to be passed on by the Big 4 was CBA with a 40 basis point drop, bringing their standard variable rate down to 7.01%. Westpac passed on 37 basis points and are now offering a 7.09% standard variable rate and ANZ, the last of the majors to announce their variable rate, provided a 37 basis point cut which will result in a 7.05% variable rate.
Looking at the recent housing finance data, variable rates are becoming less in favour; so consumers should be watching fixed mortgage rates as well.
Based on the housing finance commitments data from ABS for March, the proportion of new housing finance commitments on fixed rate loans has been trending upwards since August last year. The proportion of new loans on a fixed rate in March was 14.9% which is the highest reading since April of 2008.
Clearly it is important for consumers to be vigilant. Comparing interest rates across each of the banks can be difficult because of the different types of loan packages and products on offer as well as discounts that apply and so forth. At the very least it is worthwhile looking through the headlines to examine the actual applicable interest rates not just the extent to which the banks have moved their rates in response to the cash rate.