Much of the population in the world today has a vested interest in the current rates of interest set down by our lending institutions, so it is often with baited breath that we wait to hear whether the Reserve Bank has raised or lowered its interest rate, which in turn may have a positive or adverse effect on our loans and mortgages.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the Australian financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurance, friendly societies, and most of the superannuation industry. APRA is funded largely by the industries that it supervises and in August 2016 it published data showing that the big four Australian banks held 83% of the home loan market (including both the owner occupier and investment categories). According to a recent analysis, if there was a 25% interest rate the big four banks can make over $8,000,000 per day as a group if they do not fully pass the rate cut onto borrowers.
On a bank by bank basis the ability of lenders to pass on the official interest rate cuts to borrowers depends on many factors. These include exposure to overseas funding sources, market power, the funding mix, reserves and the extent of securitisation. But it’s also clear delaying interest rate cuts can significantly impact their bottom line.
Furthermore, if ANZ, CBA, NAB and Westpac manage to postpone lowering their mortgage interest rates say by 10 days, they can potentially make an extra A$16, A$28, A$16 and $A26 million dollars in profits, respectively.
Previous studies on mortgages, small business loans and credit card interest rates have found significant evidence that when the cash rate increases, various lending rates shoot up rapidly but when the rates drop the various financial institutions are more reluctant to respond similarly.
In general, research shows that most building societies and some credit unions can offer more competitive home loans than banks.
As many of the banks’ customer base would agree, there is no significant evidence to show that the level of customer service over the counter in the larger bank networks justifies the higher rates. This is an important observation as the mortgage spreads of larger lenders are typically higher than those of their smaller non-bank counterparts.