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
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