Tuesday, August 02, 2016

Banks short-change mortgage customers

Australia's biggest banks have short-changed their mortgage holders by passing on only a fraction of the Reserve Bank's 0.25 percentage point cut in interest rates, several of them choosing to reward depositors instead by lifting term-deposit rates.

The Commonwealth Bank will cut its standard variable mortgage rate from 5.35 per cent to 5.22 per cent rather than 5.10 per cent, meaning customers on a $300,000 mortgage will get a benefit of only $23 a month instead of $44.

At the same time, it will lift its one, two and three-year term-deposit rates to 3 per cent or higher, in a decision it says considers the "needs of both borrowers and savers".

The National Australia Bank and ANZ banks will be more stingy still, cutting their standard mortgage rate by just 0.10 and 0.12 points to 5.25 per cent. Westpac cut its standard mortgage rate by 0.14 points to 5.29 per cent.

The cuts follow a decision by the Reserve Bank to cut its money-market cash rate to an all-time low of just 1.5 per cent in order to boost employment and economic growth. The Bank will expand on its reasons on Friday in an economic statement that will spell out its concerns about underemployment and a sluggish labour market.

In his statement announcing the cut, Governor Glenn Stevens downplayed concern that it would reignite housing prices, saying the most recent information suggested that housing prices had been rising "only moderately over the course of this year, with considerable supply of apartments scheduled to come on-stream over the next couple of years."

Growth in lending for housing purposes had slowed. "All this suggests that the likelihood of lower interest rates exacerbating risks in the housing market has diminished," the Governor said.

The cut is the second this year and the 12th in the five years since the peak of the mining boom in 2011. At the height of the boom, the cash rate was 4.75 per cent and the standard variable mortgage rate was 7.8 per cent.

Watermark Funds Management investment analyst Omkar Joshi estimated the Commonwealth would save itself roughly $400 million by cutting its mortgage rates by 0.13 percentage points instead of 0.25 points. The saving would be offset to some extent by the extra cost of paying more to term depositors.

Treasurer Scott Morrison supported the banks' actions but said it was up them to explain them, rather than him.

"What I am saying is that they have lifted deposit rates and that obviously comes at a cost as well for them in terms of what they pay out, so they've got a package of response to this rate announcement. Now in a very low-rate environment, which we are clearly in, then for the banks to be able to actually say something to depositors, it's not often when you get a cut in the cash rate that depositors actually get a bit of good news," he said.

Asked whether the banks could have passed on the full amount he said there was "no real argument based on cost of funds that would mean that they shouldn't pass those on.

"But I do note that they have actually taken another action and that is to lift deposit rates," he said.

"You've got to look at the deposit-rate increase and the mortgage-rate decrease as a package of response."

The National Australia and Commonwealth banks announced their decisions within two hours of each other, the others following later. In 2011, the then-treasurer, Wayne Swan, introduced special price-signalling legislation, which made it illegal for them to communicate their decisions to each other.

Mr Morrison passed up an opportunity to attack them for their decisions saying he wanted to get away from "the same merry-go-round of all of those sort of opportunistic responses that happen after a rate decision by a bank".

The Reserve Bank's statement gave no guidance as to when it would next cut. Financial markets are pricing another cut of 0.25 points by next May.


How the big banks cut

Westpac: 5.29% (cut of 0.14 points)

NAB: 5.25% (cut of 0.10 points)

ANZ: 5.25% (cut of 0.12 points)

Commonwealth: 5.22% (cut of 0.13 points)