The big-banks have started slashing their fixed-rate mortgages, so what do they know that we don’t? I reckon they’ve seen how the chips lie, and know that a interest rate cuts are pretty much a sure-bet from here.
CBA sparked a bit of a rate-cutting and media frenzy last week when it announced that it was cutting the rates on its fixed home mortgages to below 5%.
And the majors have all since followed suit.
What’s going on? Are we entering some golden age of competition between the banks as some people have suggested? Or do the banks know something that we don’t?
Call me a sceptic, but when the big four banks control 85% of the mortgage market, I’m not holding my breath for ‘rigorous and healthy’ competition. I think the best we can hope for is some sort of muted oligopoly – and that kinda seems to be what we’ve got – punctuated by shameless bouts of collusion and rent seeking.
The sceptic in me also thinks that this might also be more about media and PR than any fundamental change in bank business. CBA saw the writing on the wall, and so seized the first-mover advantage. It now gets the kudos of being the ‘market leader’ every time the media reports it.
And when you break it down, 70 basis points sounds like a lot – close to three regular rate cuts – but it’s not actually all that amazing. CBA’s sub 5% rate only applies if you bundle in your other banking with them, and there’s an annual fee of a couple of hundred dollars as well…
And for whatever reason, Aussies just don’t seem to dig fixed-rate mortgages. In NZ and Britain, they account for almost half the market. Here’s it’s like one in 5, tops. 18% of CBA’s book is fixed rate. ANZ is like 11%
But even then, I’ve seen some estimates say that 5-year fixed rates are an even smaller percentage again – something like 1% of their books.
So a cut to 3 and 5-year fixed rates is going to have a minimal impact on their business (and from a marketing perspective, is probably money well spent!)
The other point is that the banks can afford it. Their wholesale cost of funds has been falling for over a year now. There’s this cute notion that someone in your neighbourhood puts money in the bank, and then the bank lends it out to you, and that’s how banking works.
Maybe back in the stone-age. Now, banks borrow money on international money markets and lend it to you (though deposits also have a role to play).
And the price banks pay to borrow from these international money markets has been falling.
Like this chart here shows that the 3 year swap rate, has fallen from 3.3% towards the end of last year, down to around 2.8% now. That’s a full half a percent.
In fact, some analysts are saying that banks are currently enjoying the cheapest capital on offer since before the GFC.
(You might have noticed that the banks haven’t passed these discounts on to you…. How’s that competition working out for you?)
And so a few basis points here and there, tied in with some backhanded packages and fee hikes is no skin off anyone’s nose.
What is interesting though is what this means about the banks’ longer-term view of interest rates.
That is, the banks certainly don’t see rates rising any time soon. In fact, they’re probably going lower still.
Even the most bullish commentators aren’t expecting rate hikes until the middle of next year at the earliest. But even they’re in the minority. Most people are expecting more cuts.
And markets seemed to have priced in at least one, maybe two rate cuts over the next year.
And it’s not because the Australian economy is looking wonky – though there are some questions about how the transition away from the mining boom is going to go.
No, it’s all about the global outlook, and what’s happening with interest rates around the world. The US, Europe and Japan all have their interest rates tied to zero. Policy is getting a little tighter in the US, as they unwind quantitative easing, but they’re still a long way from raising rates.
And that means there’s still a yawning interest rate differential between us and the rest of the world. If we hike rates and the gap gets bigger, then Aussies assets are paying more of a return, people will want Aussie dollars to buy Aussie assets…
… and extra demand will push the Aussie even higher.
And we know what a thorn in the side the high Aussie has been.
In fact, with markets having already priced in one or two interest rate cuts, they’ve got the RBA over a barrel. The current exchange rate – already a hefty 94 cents – factors in the expectation of more rate cuts to come.
So if the RBA doesn’t deliver the promised rate cuts, the exchange rate suddenly looks cheap, and it’s not a much of a leap from here over the parity mark.
So the RBA would be testing the markets patience if they held those rate cuts back for too long. But if they raised rates?
Forget it. The markets would quickly punish us, and we could be looking at a crippling exchange rate of $1.10 or $1.20. That’d would be a pain in the arse.
The banks know that the market’s got Glenn pinned down. And so betting on further rate cuts – which is what their adjustment to the fixed-rate is – seems like a pretty safe bet to me.
Say what you like about banks, but they’re no fools with their money.
Philippe says
This is very real.
The banks can afford excellent teams of clever people when it comes to money matters. After all, it’s their business, so they’d want to get it right. This is why we can use their findings (free of charge) to get an insight of what’s happening, especially when all the major ones are dancing on the same tune.
A bank is not in the business of losing money. So when they entice you (read ‘push’ you) to lock in a five-year rate, you can rest assured that they have done their homework and put a comfortable allowance in THEIR favour. Because THEY ain’t gonna lose, but their customers? Someone has to…
D Black says
Well, you’ve just lost me. Haven’t you heard about Fractional Reserve Banking. That’s what all Banks practice. It goes like this. The depositor puts $1 into the bank and the Bank creates $9 out of thin air, (sometimes a lot more) and lends that out at exorbitant rates of interest. Some people term this “printing money” but it is made with a computer, much cheaper than paper. Also most people think it is done by the Government, but that’s not so. In Australia, as in most other western countries, the Government borrows money, usually from foreign banks or from local banks which are majority owned by foreign banks. If our government borrowed from our own Reserve Bank, which is supposed to create the money supply for our country, then the Government would owe the money to itself, and pay .5% interest or less on it. Instead we have been conned into borrowing from foreign, privately owned banks. The real swindle occurs when that foreign owned Bank comes back to us for their interest. Of course we cant pay it, let alone the Principal. So what do they do?. They demand that we hand over the title deeds to our Railways, Ports, Tollroads, utility companies, and forests. Anything that turns a profit, they want. And we give it to them. Not a bad swindle when you realize that the money was created out of nothing in the first place.
Adam says
‘That’s what all Banks practice’
Incorrect. You are watching too many youtube documentaries. That’s not how banks work.
Doug Black says
I certainly don’t take any notice of the mass media, misinformation, & distortions of the truth. If you think that banks borrow $1 to lend $1 then how do you account for the massive increase in the money supply, sometimes 10% or 15% in one year. The world has a Derivatives debt of (officially) $600 Trillion, unofficially some say it could be $1 Quadrillion. and that doesn’t take into account, Private Debt, or Government Debt. But the Total World GDP is only $80 Trillion. So, Q1, who made this massive amount of debt money. Q 2. Who does the world owe this massive amount of debt to. Q3. If you say Governments create the money supply, that’s not true because they are massively in debt, too. If you had a printing press would you be in debt. Q4. Have you ever gone to your Bank to withdraw your $1000 only to be told , “sorry sir, we lent your money out to Bill Smith yesterday. You will have to wait till he brings it back before you can have it. ”
When I did accountancy I was told that for every Debtor there is a corresponding Creditor. So who is the Creditor, that holds all the IOU’s. In every Derivative contract there is a winner and a looser. We know who the losers (debtors) are, just about every country and government in the World, so who is the corresponding Creditor.
What I said in my post was correct. The majority will not believe me, but the majority is always wrong.
Adam says
Why are we talking about the US again? And who said anything about mainstream media? It’s in the australian law and financial regulations. Look it up. Adam
Doug Black says
Adam, I am not talking specifically about the US . I am talking about Australia and almost every other country in the world where Fractional Reserve Banking is practiced. Learn the facts and forget the fairy tales that we are fed. Try to answer my questions.
Andrew says
Hi Jon, the idea that banks borrow the money to lend on International markets is almost as cute as thinking my neighbor makes a deposit.
Banks are able to create money out of thin air, with the basis for this creation being the value of the land they are lending against, and a small fraction of that as a deposit.
If you are going to explain something it is important to do your research!!
Adam says
And where did you do your research? Let me guess – youtube. Very credible
Pete says
Yep, gotta hand it to the banks. Fractional reserve system is the biggest scam in town.Do some research on the Federal Reserve.
Simon Roberts says
Agree with the comments. It’s one thing to balance the budget and I agree that the Labor government was an economic shambles and has caused us some long term pain and missed opportunity. But the finance industry with its plethora of parasitic margin takers and trailing commission recipients should be far more accountable, as should our company executives. Perhaps a limit on lending from 9 to 1 back to a far less risky 8 to 2, such as that the banks demand of us without paying for the privilege of insuring their risk on our mortgage loans, would be a more sensible and sustainable model. The GFC time bomb is still ticking as none of the scum (read industries) who caused it have really been held to account or been modified in their ways. This is because their personal reward system is still as it was.
Ken. says
To all the would be bankers. Jon’s version makes more sense than the lot of you put together. Your reason to me doesn’t even make sense. Are you all stools for the big four banks? The banks definitely know when interest rates are going to drop. You clowns have been preaching doom and gloom for a long time. I know a lot of people who got done big time by a certain bank who conned a lot of people into splitting their home loans into two loans on the pretense that loans were going to go up about four years ago. That means fixing two thirds of their loans and leaving one third at variable. TO FIX AT THAT TIME, OR AT ANY OTHER TIME IN HISTORY, MEANT THAT IT WAS ALWAYS ABOVE THE VARIABLE RATE. well, even morons now know that interest rates crashed after that. But tell me, what is your excuse. THE MORAL TO MY STORY, DON’T FIX YET. Cheers, Ken.
Simon Roberts says
Ken, you may misunderstand what is being said. All of us agree with Jon’s analysis and conclusions. Jon has been consistently saying for many months that the next rate movement is likely to be downward. This was despite the popular media vehemently stating the opposite, although they are now bending to his train of thought as the results don’t support their previous theories. This shows how little understanding and expertise there is in this highly paid field.
I have believed Jon and am glad I did as I have stayed variable with my recent loans. Jon explains that the finance industry is not and never was fair. It is a game and if you understand some of the rules you have a better chance of gaining some success. Jon’s other gem of wisdom is to remember to enjoy life, regardless of finances. I agree. Having a rich life is not all about having lots of money.
The only disagreement is with Jon’s simplification of bank deposits and loans. His article suggests that bank loans are funded by deposits. Unfortunately, it is far riskier than that. Every dollar deposited can be used by the bank as security to then “create” another nine dollars to lend. This money is never printed. Nothing was manufactured nor any work done to earn it. Yet the banks can make a profit on the difference between the interest they charge their customers and the rate the governing bodies charge the banks to use this imaginary money. However, the customers must use real money to pay their interest bills and their total loan debt must be paid back in real money. Again, it’s not a fair game.
Banks and countries are playing a dangerous balancing act with interest payments. For example, the US can’t even afford the interest bill on its interest bill. One late payment or default could bring it all unstuck. Real people’s lives can be destroyed as all that they have worked and planned for can be taken from them because of the greed and irresponsibility of others. That is why it is so important that budgets be balanced and why a number of us want more accountability, control and risk reduction in the finance industry.
Ken. says
Hi Simon, My comment wasn’t about yours. But thanks for your comment. Maybe I got a bit wrong but it was about the first couple of comments above. Cheers, Ken.
dianekirch says
I called the CBA last week and simply asked if they could do better on my loan and they dropped it 1 full percent, I was flabbergasted, but really happy I made the phone call.
Frans Van Dyk says
Hi Diane, was that a fixed rate loan that was already left behind in the cuts of rates (so now only got back in line with the ‘normal’ rates? Am curious to know what overall rate that is now-if you don’t mind revealing the rate. I think it amazing for them to do that, unless they get it all back with new fees.
hitendra says
So does it mean the Sydney property market will go thru the roof??
Eileen says
Diane, I’m curious to know what percentage you were paying originally, for the CBA to drop it a full 1%?
Ken. says
Hi hitendra, Sydney and Melbourne in my opinion, are already through the roof. Most of Jon’s posts are about cycles, and will slow down a lot now as the rest of Aus. catches up.
The Ram says
Read a really good book over the weekend, by Harj Gill, regarding Home equity loans, ever wonder why the banks aren’t promoting this product, it blew my mind that you can purchase property as security with essentially a line of credit, your interest is charged daily and paid a month in arrears, it has the capacity to slash a typical p&i loan in half, loved this book and it really helps with getting the banks back with the rip their doing on 99.99 percent of uneducated hard working Aussies, Harj needs 1000 Facebook likes to get an even better deal for many Australians, so please get behind him and let’s teach the banks with an even better deal on HEL’s.
Please note I am in no way affiliated with Harj, I just want as many Aussies knowing about this banking loan product ASAP and stopping the banks from ripping you the educated investors off.
Eileen says
Copied and pasted from http://caveatemptorblog.com/:
The “Speed Equity System” is not all it seems
29 comments
by Sam Glover on on August 15th, 2007, in General
Harj Gill, M. Ed., has created the “Speed Equity System,” a method for paying off your mortgage early that has been getting some hype recently. What it amounts to is using your home as a bank account.
Gill advocates putting every paycheck directly to your mortgage payment, and then using a home equity line of credit to pay your expenses. He says this will save “tens of thousands” of dollars in interest and years of mortgage payments. Is he right?
Yes and no. The Speed Equity System itself really only gets you a bit ahead. So if you had a 30-year mortgage (360 payments), you would be one month ahead, at most. That is not where the system works.
The system works because it tricks homeowners into paying more towards their mortgage every month than the minimum payment. Most people just make their minimum payment every month. This is obviously pretty inefficient. The better method is to overpay.
But things really aren’t that simple. A mortgage is a low-interest, secured loan. The best way to pay off debt is to start with your highest-interest loan, pay as much as you can afford to pay every month while still satisfying your other minimum payments, living expenses, etc. Once that loan is paid off, move to the next one. Your mortgage should probably be the last loan you pay off, unless you have an especially low fixed rate on school loans.
Once you have paid everything off, you should absolutely pay as much towards your mortgage as you can. Avoid the interest and pay off your loan early. It’s a great plan.
The other portion of the Speed Equity System is more worrisome. The only way to take equity out of a home is using a home equity loan or refinancing. I don’t think Gill advocates refinancing every few years, as that would be horribly inefficient, so he must intend for homeowners to use a home equity line of credit to finance their living expenses. This might work for a frugal person. But for someone who has trouble coming up with the mortgage payment every month, this is a terrible idea. Your mortgage interest is tax-deductible. HELOC interest is notI am not a tax lawyer, so I may be wrong about this one. See below. HELOCs also have higher and more variable interest rates than mortgages, so if you are borrowing more than you should, you will actually accumulate more interest using the Speed Equity System.
Like most schemes, this one sounds better than it is. Look carefully at your own financial situation before you start having your paychecks directly deposited to your mortgage. If this all sounds like gibberish, talk to a financial advisor before doing anything rash.
Adam says
Everyone in the comments quoting nothing but youtube in regards to ‘how banks and the american fed works’ should really stop. Ok so you watched a few youtube videos on the topic and now you are experts in banking and world finance. Great work guys. You now know everything there is to know and no one can ever prove you wrong. And why do you keep talking about American default? Because that’s in those videos you keep watching. Completely irrelevant to this topic.
The original article on this page is 100% correct as far as how the big 4 borrow and lend. This is the current system in Australia. It’s called reality not conspiracy