Hey, if you're thinking of locking-in interest rates… STOP right now!
I have some highly valuable and time sensitive information that could save you thousands of dollars.
Here is why…
The next major move in interest rates will be down, but it will have nothing to do with the RBA.
Have we started outsourcing Monetary Policy to the Reserve Bank of India or something?
No, nothing like that. You'd never believe it, but the banks are set to start bringing rates down – all by themselves!
Following my blog a few weeks ago, the banks have realised that they have a social and economic responsibility to tow the line and stop gauging their customers for all their worth.
Ha ha ha ha ha ha.
No seriously. The banks can change their logos but they can't change their spots. So what's going on?
Earlier in the month, Westpac went out on it's own and cut its 3-year fixed mortgage rate to just 4.99 percent. RAMS quickly followed suit.
Now it seems that this rush of go-it-alone craziness has spread to variable mortgage rates, with Sydney-based BMC Mortgage Corporation knocking 10 basis points of its variable home loan rate to just 5.53 percent.
My tip is that this is just the thin end of the wedge, and over the next few months we'll see a lot more independent action on interest rates as the banks jostle to maintain market share.
This will give the RBA a chance to take a break, and let the banking sector take a turn at pumping up the economy a little.
Hit the showers Glenn. Take a break mate, you've earnt it.
So if it's not some new-found sense of social responsibility, what's the deal?
The truth is, that right now, banks are making massive profits on mortgage lending.
I mean, EXTRA massive profits.
Why? Because their wholesale funding costs have come right off in the past six months.
Banks have two sources for the money they lend out in the form of mortgages. First, there's deposits, where they pay you and me to make money off our money. Second, there are wholesale funding sources, where they borrow money on international capital markets, and lend it out as mortgages on a higher rate.
Following the GFC, the international capital markets took a hammering. Liquidity dried up and the price of money spiked.
This graph here wraps it up. Its shows the cost of wholesale funds, measured as the margin on the bank-bill swap rate (like the cash rate for international markets). Before the GFC, the margin on a 5 year loan was just 17 basis points.
However, the real thing to note that is that in the past six months, it has come right off, coming back down to 109 basis points. It's nowhere near the pre-GFC lows, but it's a lot better than it was.
This has meant that funding has become a lot cheaper for all the banks. The AFR recently reported that CBA raised $2bn in the US at a rate a fuller percentage point cheaper than a year ago. And as the cost of funds has been falling, the banks' margins, and therefore, their profitability, have been improving.
And this is even before all the rate-gauging that's gone over the past year or so. Since the official rate-cutting cycle began in November 2011, the RBA has cut rates by 175 basis points. The majors have, on average, knocked just 136 basis points of the Standard Variable Rate, pocketing 39 basis points for themselves.
As a result, the banks are again enjoying record profits.
In fact, the profit margin on mortgages is the best it's been in ten years. This graph here, prepared by UBS and published in The Australian, paints a pretty clear picture.
Mortgages are incredibly profitable right now. Banks are now earning a massive 88 points on every new mortgage, equal to about $80,000 over the course of an average loan.
On the back of this, CBA, posted a record $3.78 bn half year profit this month. They're literally rolling in it. And as Australia's biggest mortgage lender, with a full 25 percent of the mortgage market, CBA enjoyed a very satisfying 13 percent profit growth in retail lending.
ANZ, NAB, Bendigo and Adelaide Bank have also reported wider profit margins from consumer lending in their half-year results.
I can hear the bottles of bubbly popping from here…
So with the banks making record profits of mortgage lending, why would any of them cut rates and rock the boat?
It's true that there's a strong incentive not to. The banking industry enjoys a competitive reputation, but it's a pretty cosy oligopoly if you ask me. The rules are geared heavily in favour of the majors, and the minors do what they can.
But with mortgage volumes still in the early stages of recovery, there will be a strong incentive for both the major and minor banks to sacrifice a bit of short-term margin, for a bit of long-term market-share.
There's an uneasy truce right now. But I reckon we'll see more and more smaller mortgage lenders like BMC cut rates on their own. Then one of the regional banks will get nervous and pull the trigger, and once they move, everyone will be forced to follow.
With the majority of customers still doing all their banking with a single institution, market share in the mortgage market accounts for a lot.
And so over the next few months, I expect we'll see rates come down a significant amount, and it will have nothing to do with the RBA.
And remember that the RBA still sees the risks weighted to the downside, so the ABA's claim that if banks cut rates independently, the RBA would just raise them back to where they were, is ridiculous.
Speaking of which, is anyone else enjoying the on-going spat between the Chamber of Commerce and Industry and the Banking Association?
ACCI CEO, Peter “and the wolf” Andersen came out on the offensive again last week, labelling the banks rate gauging as nothing less than “highway robbery.” ABA chief, Steven “evil Baron Von” Münchenberg, hit back saying “ACCI's call is based on both false claims and a profound lack of understanding of how monetary policy works.”
It's entertaining theatre, but the ABA must know that the game is up. When you've got politicians, mums and dads, and the entire Australian business community lining up to sink the boot in, something's got to give.
And about time too, I say.
So, when you see the newspaper headlines “RBA Unlikely To Cut Further”… it doesn't mean that the cost of money will stay where it is….
The greed of billion dollar profit thirsty bank CEO's will see to that.
Based on that, I reckon the “cost of money” is going down, down, down…like the prices at Safeway or was that Coles…? (Hmmm…so much for multi million dollar media campaigns.)
Anyway…Great times ahead for savvy, smart and in-the-know investor like you.
Go for it!