How the Big Four Banks Trapped Homeowners
Everyone, pick up a pitch fork, mobilise your neighbours and take to the streets.
The nearest bank.
It doesn’t matter if it isn’t your bank.
Just head to the nearest money-grubbing building responsible for storing and creating money and then unleash your rage.
After all, it’s your right as a consumer to be furious.
Westpac jacked up the mortgage rate on Monday.
CommBank and ANZ did the same yesterday.
Increasing the mortgage rate even when the Reserve Bank of Australia isn’t.
Yet, top brass at the banks then rake in millions each year at your expense.
How dare they raise rates on everyone else.
Heartless, thieving, grubby banks are out to rob you blind.
Rage all you want.
As I’m about to show you, it doesn’t matter.
You’re locked in now.
Hell hath no fury like a customer whose mortgage just increased.
For most of this week, there’s been nothing but blind rage from the mainstream press. All directed at the Big Four banks.
Politicians weighed in. They told us the banks were unfairly targeting ‘middle Australia’ and reminding the good Australian people that banks were ‘taking advantage’ of us.
Even Prime Minister Scott Morrison joined in. He suggested we vote with our feet and take our business elsewhere.
Nothing makes a politician more electable than making comments that makes them appear relatable.
But it shows how little they know about banking.
Middle Australia is trapped.
And it’s all thanks to some clever financial engineering from the sixties.
Big Four Cartel
Westpac increased the owner occupier rate by 0.14%, CommBank by 0.15% and ANZ by 0.16%.
At worst, it’s another $40 a month for the average $396,000 home loan.
But here’s the thing. The banks can raise rates, and most Aussies are a captive audience.
We have no choice but to deal with it.
There are two parts to this problem.
For starters, the Big Four can jack up mortgage rates as much as they want.
Why? Well, we gave them that power.
Of the $1.7 trillion in outstanding mortgages, the Big Four hold some $1.3 trillion.
That’s right, almost 80% of all Aussie mortgages belong to the oligopoly of Australian banking.
Not only that, but of the 147 authorised deposits-taking institutions (ADIs) in Australia, Aussies predominantly chose to use only four banks. Meaning the Big Four got three quarters of our total banking business.
Simply put, the Big Four only control the market because we allowed them too.
We gave them our business.
The second part of the problem comes when the average Aussie will discover they can’t switch home loan providers as easily as they think.
In fact, two million of us may be held hostage by our banks.
The trouble with financial engineering
Regardless of the pleas from politicians, there’ll be very little shopping around for a lower rate.
And this is where lenders mortgage insurance (LMI) becomes a problem.
Now, most banks are happy to use this.
LMI means banks get paid even if you default on your home loan.
A general rule of thumb when it comes to buying a house is that you need a 20% deposit.
But if you only have half that deposit, LMI steps in and ‘pays’ the other half for you.
In other words, LMI is used to fill the gap between the deposit you have and the full 20% required by the bank.
That way, when the bank writes the loan, the bank claims it received the full 20% deposit. Even though a portion of it was filled by LMI.
But here’s the twist.
A person can’t change their home loan to another bank until the total value of the LMI is paid back.
Sure, they may be able to refinance it with the same bank, but they can’t go to a new bank until the LMI is paid in full.
The decade-long debt
Let me put it another way.
Let’s say you needed $20,000 in lenders mortgage insurance to meet the 20% deposit requirement in order to qualify for your home loan. Easy done. LMI fills that gap.
Then, when the three year fixed rate period expires, you want to refinance the home loan with another bank.
However, over that time, it turns out you’ve only paid $2,000 back in lenders mortgage insurance. You still owe some $18,000 in LMI.
And you can’t move banks until that $18,000 is paid back.
What’s a mortgagor to do? Scrounge up eighteen grand to pay off the LMI all so they can switch to a new bank?
No. The reality is, the customer is far more likely to refinance with the current bank and accept whatever the home loan rate is.
Meaning people are locked into a bank for far longer than the initial ‘fixed’ interest rate period at the start of the loan. In recent years, LMI has increased, providing as much as 15% of the deposit shortfall.
There have been cases where the LMI has taken 10 years to pay back.
But the size of this problem is about to be discovered.
Of the 5.8 million mortgages in Australia, more than two million used lenders mortgage insurance to meet the deposit requirements.
The point is, the mainstream and the politicians can holler all they like about rate hikes.
They can pretend to be on your side and demand you switch banks to teach the greedy banking sector a lesson.
But the reality is, in the past two decades, LMI was used as a quick entry into the housing market. And in the process, large LMI balances mean that people have to pay that off first.
An outstanding lenders mortgage insurance balance will prevent many ordinary Australians from switching banks.
If you can, by all means shop around and try to get the cheapest mortgage rate available.
Take steps to lower your day to day costs where possible.
But despite the hyperbolic claims, there’ll be no mass exodus of the Big Four.
That’s because they’ve trapped you.
And that’s how they like it.