Disclaimer: The content from The Daily Reckoning Australia’s global cast of characters is their own view and opinion. It is not to be taken as investment advice.
Mortgage Rates Going Up
‘My bank lifted my mortgage rate today. The initial rate lasted one payment.’
‘Yeah. We got a letter on that too. Ours got raised 15 basis points.’
This was the email thread between my publisher and editor on Thursday last week.
Turns out, both of them received a letter advising of a mortgage rate increase. And they both have mortgages with different banks.
Boo to the banks, right?
Out to rob you of your dollars.
We saw the royal commission. Their dirty laundry was aired.
Charging dead people. Encourage bank staff to push products onto us.
We know banks only do things to line their own pockets.
Raking in billions of dollars in profits each year.
Banks. They’re a racket and a sham.
But here’s the thing.
No one complains about banks hoarding cash in a bank run.
The royal commission is estimated to have cost us $75 million. At least, that was the projected cost back in January.
Given how government departments work, I suspect the final cost will be much higher.
Nonetheless, it took a minimum of $75 million to tell us what we already know. Banks are greedy. Hardly a revelation.
And given the tone I’m hearing at backyard barbecues and in the school playground, my co-workers aren’t the only ones feeling the sting. More and more people are being hit with a mortgage rate rise.
The rate changes are hitting the savers, too. While the mortgage rate increases get the headlines, term deposit rates are falling at the same time.
Meaning, while they jack up a mortgage by 15 points, savings accounts are dropping by a similar amount as well.
Obviously, not everyone is happy about it. No one likes their costs to go up. Especially when the big four banks rake in tens of billions in profits each year.
To add insult to injury, the banks are increasing their mortgage rates even though the Reserve Bank of Australia hasn’t changed the cash rate since August 2016.
Out to rob the little people or is this part of something bigger?
Ending the lock step dance with the RBA
To many, this move seems grossly unfair.
How could the banks change their rates when the RBA isn’t?
Easy. They can.
Aussie banks are under no obligation to do what the RBA does.
You see, the RBA sets the cost of money, whereas Aussie banks set the cost of loans.
The thing is, for too long, Aussies just accepted that banks would follow the RBA’s lead with regard to interest rates. We got used to it, expecting that it would continue like that forever.
Since the early 2000s, if the RBA hiked or decreased rates, generally the banks would follow suit. And often, the banks would ‘pass on’ the full change.
However, in mid-2014, that all changed.
ANZ announced it would hold its own monthly meeting after the RBA meetings. The goal was to end the ‘lock step’ link with our central bank’s decisions.
I remember the day the announcement came out. The outrage was incredible.
ANZ was slammed for being greedy. Hurting the average Joe. Apparently, ANZ were nothing but thieves and I’m sure I remember a push to ‘break up with your bank’.
Yet, the ANZ announcement merely reflected what all the banks were thinking. They just wore the outrage.
Quietly, over the next six months, the other three major banks followed suit and dropped the RBA rate change link themselves.
Bumping up the coffers
Now, let’s put this in perspective.
When ANZ announced it would set its own interest rates, the RBA cash rate was 2.50%. And it had been all year. In fact, the next policy change from the RBA didn’t come until February 2015, when it lowered the cash rate to 2.25%.
In addition to that, the US Federal Reserve Bank had yet to begin increasing rates from 0.25%. The Eurozone was in the process of cutting rates further into negative territory.
To an outsider, there seemed to be no need for a bank to hold its own monetary policy meetings.
The RBA wasn’t making drastic policy changes. And the cost of international money was cheap.
On the surface, ANZ’s move looked like another money grab.
The reality was very different.
The major banks’ net interest margins — that is, the difference between their lending costs and what they charge you — were shrinking.
In other words, that buffer between the RBA cash rate and the rates they charge was dropping. They had fallen from a post-GFC high of 2.50% to an all-time low of 2.20% in 2014. Even now, the net interest margin is still only slightly above 2.30%.
That’s a dangerously low buffer for an Aussie bank.
The banks’ decision to set their own rates was about protecting themselves. At the time, there were considered pariahs for doing so.
However, when a bank takes moves to protect itself, this, in turn, works for you.
You have to remember that we live in a world of fractional reserve banking. Banks lend out, on average, 10 times more than the cash they hold.
Bumping up the mortgage rates isn’t just greedy bank business. It’s a step towards making sure the coffers are full in the event of another crisis.