Cheaper mortgages are out there

John Collett - SMH - December 16, 2009

Experts say customers should be prepared to look beyond the big banks.
Westpac's decision to raise its standard variable interest rate by 0.45 percentage points when the offical rise in the cash rate was 0.25 percentage points is a public relations disaster. The rate hike, almost twice that of the Reserve Bank, has outraged the Government and will outrage its home-loan customers, especially those who have only just taken out a mortgage with the bank.
Prime Minister Kevin Rudd said last week that the bank had done the "wrong thing" through its rate hike and urged customers to take their business elsewhere if they were concerned.
"Customers out there should be looking at where else they can do their banking," he said.
NAB lifted its mortgage rate by 0.25 percentage points, ANZ by 0.35 percentage points and CBA by 0.37 percentage points. Of the big four, NAB now has the lowest rate of 6.49 per cent, with Westpac the most expensive at 6.76 per cent.
"We have had a lot of feedback from people who have recently taken out Westpac loans that are reconsidering and we expect to see a fair amount of switching from Westpac to NAB," says the chief executive of financial comparison site Infochoice.com.au, Shaun Cornelius.
"Consumers are letting the big banks get away with too much."
There is almost a full percentage point difference between the big-bank rates and the smaller players and the gap is widening, he says.
For a while now, the banks' mortgage rates have decoupled from changes in the cash rate. When the cash rates were being cut the banks handed on less to their mortgage customers. Economists say further rate rises will be needed next year and beyond to keep inflation in check as the economy improves. The cash rate is now 3.75 per cent.
The chief economist at AMP Capital Investors, Shane Oliver, expects the cash rate to increase to 4.75 per cent or 5 per cent by the end of next year as the economic recovery gathers pace. He says that while the Reserve Bank will continue to raise the cash rate, it will do so only gradually. He says the additional increases in bank lending rates may even stop the Reserve Bank from more aggressive rises.
Oliver is sceptical about the banks' claims that the rises reflect the increase in funding costs. The banks are paying higher interest rates on their deposit accounts but Oliver doubts that the cost-of-funding argument can fully justify the increases in mortgage rates.

Before the global financial crisis, the big banks were charging mortgage holders about 1.8 percentage points more than the cash rate.
Oliver says that margin is now approaching 3 percentage points.
Cornelius also doubts whether the increases are fully justified. He says the reason for the super-charged mortgage rate hikes are more likely to be that the highly profitable banks are not under enough pressure from their customers. It is up to consumers, if they are not getting a good deal from their bank, to move to a cheaper lender, he says.
The standard variable mortgage rate of the big four banks is 6.63 per cent, on average. That could could rise close to 8 per cent by the end of 2010 if the banks continue to increase their rates by more than the increases in the cash rate before peaking in late 2011.
Cornelius says mortgage holders should factor in increases in mortgage rates of at least 2 percentage points to be on the safe side.
The rate rises should be kept in perspective. Normal standard variable rates are about 8 per cent and rates are increasing from a decades-low cash rate.
Cornelius says it is too late to take out a fixed-rate mortgage. The best time to fix was at the beginning of this year when three-year fixed rates were about 5.5 per cent. Three-year fixed rates are now about 7.5 per cent as money markets have already factored in higher cash rates.
Cornelius says consumers should stick with variable rates but shop around for a better rate, while being aware that if they move they may be hit by an exit fee. The exit penalty typically applies if a mortgage is terminated within five years. The penalty can be levied as a flat fee or a percentage of the loan value. They are sometimes tiered so that the earlier the termination, the higher the penalty. But the savings by switching lenders, even if a penalty is incurred, are potentially large, Cornelius says.