Tuesday, November 01, 2011

The Reserve will cut, the banks will pass it on

Australia’s banks are flush with funds ahead of an expected cut in the Reserve Bank’s cash rate today, in a position to pass in full a saving to a typical mortgage holder of $49 per month.

Prudential Regulation Authority figures show an extra $12.3 billion was pumped into bank deposits in September as Australians sought safety amid global economic uncertainty.

Commonwealth Bank deposits were up 2.6 per cent, National Australia Bank deposits up 1.1 per cent and Westpac deposits up 1.2 per cent. ANZ deposits were flat.

The jump in deposits of 0.9 per cent is well above the growth in lending of 0.6 per cent, giving the banks an incentive to price keenly to sell more loans.

The Treasurer’s office confirmed yesterday it had phoned the heads of each of the big banks to pass on the Treasurer’s wish that they pass on any cut in full.

To further pressure the banks Mr Swan will today release new details of the way his bank switching package will work including the “Key Facts” document that will be to be every person offered a new loan from January...

The two-page document displays a total amount to be paid back which in the example given is two and half times the amount borrowed. It also indicates how much extra would be required per month if the variable mortgage rate was lifted 1 percentage point.

To demonstrate the importance of repayments it includes a calculation of how much quicker the loan would be paid off if the monthly repayment was $200 higher. In the example given the $400,000 loan is repaid in 23 years instead of 30.

Since Mr Swan banned mortgage exit fees on new loans from July 1 Treasury believes 167,500 households have taken out loans completely free of exit fees, making it easier to switch to get a better rate.

Treasury figures show the government has invested $13.8 billion in residential mortgage securities since the financial crisis, helping 20 smaller lenders raise a total of $34.4 billion for home lending, $1.8 billion of it for small business funded by mortgages.

“Our investments in residential mortgage banked securities have been an unequivocal success, ensuring a flow of funding for smaller lenders through the dark days of the financial crisis meaning they are now putting substantial extra competitive pressure into the banking system,” the Treasurer said.

The Reserve Bank will announce its decision at 2.30 pm. Several of the big banks are expected to respond immediately.

Adding weight to indications the inflation rate is low enough to justify a cut the TD Securities inflation index for September released ahead of the board meeting showed prices climbing just 0.1 per cent in September, increasing just 0.03 per cent in three months. The annualised inflation rate calculated from the past six months of data is just 1.2 per cent, well below the Reserve Bank’s target band of 2 to 3 per cent.

House prices fell 0.2 per cent in seasonally adjusted terms in September according to RP Data, to be down 3.4 per cent over the year. Sydney prices were down 0.6 per cent and 1.2 per cent annually, Melbourne prices down 0.3 per cent and 4.4 per cent annually.

In news more encouraging for the Reserve Bank private sector borrowing grew in September, climbing 0.5 per cent after increasing 0.2 per cent in August.

Published in today's SMH and Age

Required Key Facts Mortgage Form

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