Puzzle Finance Blog

Lenders are on borrowed time

WE ALL like a bargain. Especially on our mortgage rates. So when we see a better one come up, we are all prepared to change.

In fact, 81 per cent of mortgage holders would switch or consider switching if they found a lender with a more competitive interest rate, a survey of national mortgage expectations and intentions by credit union CUA has revealed.

And, surprise, surprise, we are not happy when our home-loan providers raise rates independently of the Reserve Bank. The wrath poured on those institutions that raised rates recently, even though the RBA did not, is testament to that. The data highlights this as well. As many as 77 per cent of mortgagors would consider switching if their lender raised rates when there was no official move.

I dare say the banks are well aware of our intentions and probably would not be happy with as much as 77 per cent of their customer base shifting. Which raises the question: why do they do it?

Well, they say funding their borrowing on the wholesale markets is becoming more expensive. When banks don't have enough in the way of deposits to support their loan book, they need to borrow that money from somewhere, and this is called wholesale borrowing. The percentage of their home loan funding that is sourced from wholesale markets has fallen from pre-global financial crisis levels but it is still about 40 per cent.

And the European crisis has made it more expensive to borrow on international markets, where costs are estimated to have risen by a quarter of a percentage point over last year's final quarter. But also, for the banks, every 20-basis-point home loan repricing - that is, raising interest rates by 0.2 percentage points out of cycle or more than 0.2 percentage points above the RBA's rise if it does raise rates - can have a bottom-line impact for the banks of as much as a 5.7 per cent increase in earnings on an annualised basis.

Morgan Stanley crunched some numbers earlier this year to work out the impact of potential home loan repricing on banks' bottom lines.

The average margin impact of a 0.2 percentage point increase in rates is 0.07 per cent. That leads to the cash profit, or earnings, increase on an annualised basis of an average 4.6 per cent. The range for the big four is 3.2 per cent to 5.7 per cent. So, a six- or seven-basis-point interest rate rise may seem a ridiculously small amount but it's kind of a big deal to the banks.

Don't get me wrong, I'm not trying to defend them, just trying to explain their motivation.

While the banks would be nothing without their customers, they also need their shareholders, which is why maintaining - or increasing - rates matters to them.

It is obviously not a question of breaking even. But the market is used to big profit announcements from the banks - when it doesn't get them, the share price takes a hammering.

A consequence of all this, of course, is our increased distrust. A large number of people - 75 per cent of mortgage holders, according to the CUA's National Mortgage Survey: Expectations and Intentions survey, are choosing not to fix at all. And I would hazard a guess that distrust is part of the reason. It is easier to move from a variable mortgage than one with a fixed rate.

So these are some of the issues at play for the banks but don't forget that the strongest message you can send is with your feet.

Posted by Penny Pryor - The Age on 4th March, 2012 | Comments | Trackbacks

Bookmark and Share

The trackback URL for this page is http://www.puzzlefinance.com.au/trackback?post=25732696


There are no trackbacks for this post


There are no comments for this post

Post a Comment

HTML is not allowed in comments, http://... will be automatically linked.

Name (required):

Email Address (not displayed):

Comment (required):

To help prevent spam, please enter the word axle here:

Puzzle Finance Blog

About Puzzle Finance


September 2017
August 2017
July 2017
June 2017
May 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010


Purchase or Rent (1)
The Age (1)