Updated: Dec 11, 2019
The big four banks have been building up their cash buffers over 2019 by paying less for the money they lend to home buyers, without sharing the benefits with borrowers, new analysis shows. The Canstar analysis shows the banks’ wholesale funding costs (the money they borrow in commercial markets) have decreased since the start of this year, while the market average standard variable mortgage rate for owner-occupiers has barely fallen.
According to research from CanStar, between September 2017 and September 2018, the 180-day bank bill swap rate (BBSW) – the short-term interest rate used as a benchmark for the pricing Australian dollar derivatives, most notably floating bond rates – increased from 1.89 per cent to 2.15 per cent. That pushed up the four big banks’ funding costs, and in October and November of 2018, many responded by increasing the variable home rate they charge existing customers, the analysis shows. But over the course of this year, funding costs have dramatically decreased, by almost 2.6 per cent, leaving the BBSW at 1.99 per cent. However, the big four banks haven’t cut mortgage rates.
What is noteworthy is the behaviour of lenders this year, as wholesale funding costs have been falling. Forty-four lenders have reduced fixed rates, and only five have put them up. The extra money the big four banks have made from the reduced cost has been spent on attracting new borrowers, by offering low-interest rates, to the detriment of existing customers. A market share battle has broken out for the diminished pool of borrowers in the market who tick all the credit boxes, and this group is being rewarded with historically low rates.
But before we go bank bashing, we need to look at the whole picture, including bond yields and deposit rates. The situation is more complex than looking at one rate. Part of the reason costs were going up was because banks were under pressure to make sure lending was up to standard. We are better off looking at bond yields and deposit rates. Bond yields, which are a prime driver of costs, have fallen because people were worried about a global slowdown. Australian 10-year bond yields continue to nudge new lows of between 1.7 per cent and 1.9 per cent.
Banks borrow money to lend money and you need to look at what the cost of borrowing that money is – it isn’t the 180-day swap rate. If you think about bond rates, particularly recently, they’ve been falling so they would help lower the cost. The reality is though, big four bank margins are very high and some people paying mortgages are financing the banks. Are the big four banks charging too much? The answer is yes, just look at the competition which offer much cheaper rates.
Talk to us today at Heart Mortgage Services by calling 1300 861 143 so we can investigate if there is a better deal out there for you.
Your Choice Mortgage Brokers Pty Ltd atf Halo Innovation Trust trading as Heart Mortgage Services - Australian Credit Licence 38643
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