As the RBA holds the cash rate, brokers are concerned about interest rate 'creep'
THE RBA had always said its next move would likely be a rate increase, but Governor Philip Lowe has now altered the central bank’s position to a more neutral stance, suggesting it could go either way. While Australia’s cash rate has now been at 1.50% since August 2016, some commentators are saying there are more and more reasons to make a move.
But the RBA has kept the rate on hold as it waits until inflation is within its target range. But even if inflation gets there, it does not mean the RBA will move the rate, according to Canstar’s group executive of financial services, Steve Mickenbecker.
“They also want to see some wage inflation to give people a buffer; it’s been a long time since we have had wages growing, and that’s necessary to give borrowers a buffer in the event of payments going up,” he says.
“If something goes wrong within the world economics, down is the most likely thing [for rates]. If inflation goes down and stays there, up is more likely” Steve Mickenbecker, Canstar
Speaking at the National Press Club in February, Lowe addressed monetary policy, saying “Looking forward, there are scenarios where the next move in the cash rate is up, and other scenarios where it is down.
Over the past year, the next-move-is-up scenarios were more likely than the next-move-isdown scenarios.
Today, the probabilities appear to be more evenly balanced.”
Explaining what the RBA would look for before deciding which way to move rates, Mickenbecker says: “Their prime objective is to get inflation in that target range. They have to see a problem globally with growth before they reduce rates. Either way, whether it’s up or down they’re not going to move until they’ve got some clear evidence. If something goes wrong within the world economics, down is the most likely thing [for rates]. If inflation goes down and stays there, up is more likely.”
The RBA’s monthly cash rate has always been a benchmark for standard variable rates, and the banks traditionally would only have moved their rates to coincide with it.
However, bank rates have been moving considerably over the last several months without any movement from the central bank.
Bank of Queensland was the first to hike rates in 2019, by up to 18 basis points. Since then, Virgin Money, ING, ME and Macquarie have also increased rates. Mickenbecker says, “What we’re seeing is the household rates are going up in response to movements in the US.
So the borrowing rates the banks can get have gone up. That means they have put through rate increases of 15, 16 basis points.
“Something else going on is that the banks over the last few months have reduced some rates on basic products and some rates on short-term fixed rates because they don’t have to pass that through to existing borrowers. It’s only available to new borrowers.
“We have seen variable rates going up to cover the cost of funding, and that powers through to existing borrowers.” In the ACCC’s Residential Mortgage Price Inquiry last year, the commission found that new borrowers were paying less than existing borrowers.
It said, “The average interest rates paid by new borrowers on variable rate residential mortgages with the Inquiry Banks have been less than those paid by existing borrowers since at least June 2015. This is due to larger discounts being offered to new borrowers compared to borrowers who took out their residential mortgages 12 months or more prior.”
A bank is never going to ring you up and offer you a discount, whereas with us that’s what we do” Rob McFadden, Hypothèque
These changes for existing but not new borrowers are what one broker calls “rate creeps”, and he says the banks are manipulating the market.
Rob McFadden is the owner of mortgage brokers Hypothèque and is the man behind the recent petition in support of brokers.
He says it was in the 1990s that banks became more “dollar conscious” and introduced multiple new home loan products.
The rate creeps started when banks began offering discounts for new customers. “So, let’s say you’ve got a thousand customers on a 7% rate, then they decide to offer new customers 6.9%. Over time these discounts became greater and greater for new business,” McFadden says.
In other words, to boost business banks would offer discounted home loan rates to new customers, while keeping the old customers paying more. They then began increasing rates out of tune with the RBA.
“What the banks have been doing is citing funding costs, and when the RBA drops the rate by 25 basis points the banks say, ‘We’re only going to pass on 15’. But then they’ll up the ante for the new customers and pass on the full 25. And that’s a very clever way of manipulating the market,” McFadden says. “And by the same token, when the RBA puts up the rate, again the banks will bring out ‘funding costs’ claims and put the rate up 35 or 38 points. This has been repeating over time, and so the standard variable rate has become higher and higher in relation to the Reserve Bank cash rate.”
McFadden says these rate creeps are why brokers deserve their trail commissions, as they continually monitor these rate changes and ensure their customers are on the best deal possible. He adds, “A bank is never going to ring you up and offer you a discount, whereas with us that’s what we do – we continually review and contact our customers to try to negotiate a better deal.
The trailing commission was designed to help us maintain that ongoing relationship with the client. “If you have two customers with the same original loan – one through a bank and one through a broker – chances are the one with the broker five years down the track will be paying less, because they’ve had someone renegotiating for them.”