It’s time for the banks to provide a guarantee on their interest rates
Paul Ryan | July 04, 2017
The repricing of home loans and investment loans by the banks is getting out of control and hurting Australian borrowers.
In fact, I think it’s time for the Federal Government and Australian Competition and Consumer Commission (ACCC) to intervene in what seems to have become business as usual for the banks to increase interest rates outside of the decisions made by the Reserve Bank of Australia.
Last week Westpac announced an increase of 0.34% to owner-occupied and investment interest only loans while cutting owner-occupied principal and interest loans by 0.08%. NAB and CBA followed up with similar announcements.
I estimate that Westpac’s decision to increase interest rates on their variable rate interest only loans by 0.34% and to reduce principals and interest variable rate owner-occupied loans by 0.08% will have increased their profits by over $150M per annum. Add in NAB and CBA and the impacts on profits are massive.
In November 2015 the cash rate was 2% and has since been cut to 1.5% by the RBA, yet the banks have repriced a number of loans in December 15 and 16, March 17 and now again. It is too easy to blame a rise in the cost of funds or the extra demands from APRA as a reason to charge Australian borrowers more.
The notion of increasing the rates for existing customers while still offering discounts and incentives to new customers is wrong. I find it difficult to accept that banks and other lenders can offer incentives and discounts to attract new business and then all of sudden reprice an existing customer’s loan by 20 to 30 basis points.
Why do I think the Government and the ACCC should intervene?
If it was ok for the Federal Government via the Australia taxpayers to offer guarantees to the banks through the GFC why isn’t ok for the Federal Government via the banks to provide some protection for Australian taxpayers when they borrow money.
So what would I like to see happen?
I’d like to see the banks and other lenders say, "we want you to come on board as a new customer and as a show of good faith we will guarantee the interest rate on your loan will not move outside any RBA move for the first 3 years of the loan."
It is then up to the bank and other lenders to price their loans accordingly and give some comfort to customers who have chosen them as their new lender.
It’s too simplistic for the Government to say, it’s ok if you aren’t happy with your existing lenders we’ve made it easier to change lenders as there is strong competition from the non-major banks and non-bank lenders.
In reality, the non-major banks and non-bank lenders are businesses and have shareholders. When the major banks increase rates the smaller players see it is an opportunity to put a little extra back into their own business. They might not increase rates as much as the big banks but history tells us they still increase their rates which again hits the pockets of Australian borrowers.
Just in the last couple of days ME Bank, Bendigo Bank and ING have followed the majors.
One final point. If the APRA regulations are designed to take the heat out of the property market then banks and lenders can simply tighten their lending policy and criteria for new loans to meet the new APRA requirements.
They didn’t need to increase the interest rates on existing home and investment loans.