BANKS are making a profit of almost $80,000 on each new mortgage customer over the lifetime of the loan – the highest level in almost a decade – making out-of-cycle reductions in lending rates “inevitable” as competition grows.

Experts said the surge in bank profit levels with the Big Four pocketing more than $25 billion last year has been driven in recent months by a huge lift in the profit margin of millions of Australian’s home loans.

And UBS analyst Jonathan Mott yesterday warned of a political backlash if the majors didn’t cut rates outside of Reserve Bank movements.

There is a real risk politicians will step-in and regulate the market to ensure consumers get a better deal, he said.

The new research shows the banks are making an annual profit of about $2,640 on the average $300,000 mortgage that is being written – this would represent a profit of $79,200 over the lifetime of a 30-year mortgage.

But Mr Mott said the surge in profits stemming from the mortgage sector is being eroded by the the growing losses being made by the bank’s generous term deposit rates – which he expects to continue falling over coming months “Banks are in a purple patch,” he said.

“Over the last 12 months a rapid reduction in credit spread and mortgage repricing implies that writing a wholesale funded home loan has never been more profitable. And we believe that if the global economy continues to show signs of stability and growth, debt markets continue to rally (reducing wholesale funding costs) leading to an easing in deposit competition, then the banks will be in a position to begin passing through out-of-cycle rate cuts to mortgage customers.”

Since this rate-cutting campaign began in November 2011, the Reserve Bank has lowered the official cash rate by 1.75 percentage points to 3 per cent, equal to the “emergency lows” of the financial crisis.

But over the same period on average the Big Four have dropped their mortgage rates by only 1.36 per cent from a peak of 7.79 per cent to the current standard variable rate of 6.42 per cent.Three smaller banks last week cut mortgage rates outside of the Reserve’s cycle for the first time, putting pressure on the major banks to lower the standard variable rates (SVR).

After handing down a another bumper profit result Commonwealth chief executive Ian Narev this month conceded the competitive nature of the Australian mortgage market and the fall in funding costs, meant it was “conceivable” the big banks might cut lending rates even if the Reserve kept the official rate on hold.

But the Australian Bankers Association yesterday said there have been only two periods in the past 23 years when mortgages rates have been lower than today.ABA chief executive Steven Munchenberg said mortgage rates have fallen significantly in the past five years which should be good news for consumer and business confidence

Posted by Stephen McMahon – News Limited Network on 26th February, 2013