Banks around the world look upon Australia's big four with envy and wonder. How can one of the world's most profitable banking sectors get away with raising mortgage rates shortly before the RBA announces the official cash rate?
And while we're at it, how can four banks control about 80% of the Australian mortgage market? Since when is the tail allowed to wag the dog?
These are reasonable questions, and this is hardly the first time they've been asked. NAB announced an after-tax full-year profit of $6.3 billion today, up 20% from last year, and ANZ is expected to announce a windfall of around $7.29 billion tomorrow. Yet both of them, along with the similarly profitable Westpac and Commonwealth Bank (CBA), recently hit mortgagees with a rate hike.
Rate raising race: who went first?
The banks have a history of raising rates outside of the RBA's cash rate cycle. It only takes one of them to make the move and you know the others are going to follow.
Here's how it panned out this time around:
1st – Westpac raises its variable home loan rate by 20 basis points – or 0.2%.
2nd – CBA raises rate 15 basis points.
3rd – NAB raises rates 17 basis points.
4th – ANZ raises rates 18 basis points.
CHOICE has long called on the federal government to take a hard look at the highly concentrated banking sector in Australia, where competition is stifled compared to other modern economies and consumers wear the consequences in the form of high interest rates and fees.
As part of its response to the Financial System Inquiry Final Report, the government has committed to review competition in the banking sector, but the banks don't seem to be quaking in their boots.
"No sooner was the federal government's response to the inquiry released than we saw co-ordinated, out-of-cycle rate rises from the big four banks, followed by a massive jump in profits," says CHOICE Campaigns Manager Erin Turner. "This is cynical behaviour. It's certainly not what a competitive market looks like."
How much will the mortgage rate increases hurt?
The rate hikes may look like small numbers, but they add up to big ones for banks with so many customers, and the hikes will have real impact on borrowers already under pressure to make ends meet.
ANZ, for instance, has said its 0.18% increase will add $36 extra per month to its average home loan amount of $242,000. More generally, estimates are that a $300,000 mortgage will cost borrowers about $500 more a year on the back of the respective hikes.
Why did the big four banks raise rates?
Because they could. But the banks maintain it's because they've been instructed to increase the amount of capital they hold against their mortgages, as called for in the Financial System Inquiry and required by the Australian Prudential Regulation Authority (APRA), which regulates banks.
Having to hold more liquid assets will presumably put a dent in the banks' profit margins, so rather than accept slightly diminished profits, they've passed on the new costs to their home loan customers. Hey, it's business – this is what massively profitable institutions do!
As NAB head of personal banking Gavin Slater has pointed out in recent media reports, the bank has to do right by its 555,000 or so shareholders first and foremost. Actual customers, it seems, come second.
Why do Australians stick with the big four banks?
Our banking satisfaction surveys have historically ranked the big four the least satisfactory when it comes to customer service, yet they seem to have a knack for holding on to customers. Credit unions and building societies, also called customer-owned banks, have consistently rated much higher.
Customer Owned Banking Association (COBA) CEO Mark Degotardi told us home loans customers should consider a customer-owned bank, where mortgage rates are currently lower on average.
"Customer-owned banking institutions are much less visible to consumers because we can't match the massive marketing spend of the majors," Degotardi said. "Government and regulators have failed to do enough to change the consumer perception that the major banks are more secure than other ADIs [authorised deposit-taking institutions]. Major banks use their sub-brands to lure customers who would prefer an alternative to a major bank."
Are there better mortgage deals out there?
Taking ANZ's new standard variable home loan rate of 5.56% as a comparative benchmark, the answer is a resounding yes.
A quick check on the CHOICE Ditch and Switch service shows quite a few better offers from both banks and mutuals (also known as credit unions, building societies and customer-owned banks).
Our top ten Ditch and Switch credit union, building society and bank comparison home loan rates range from 3.99% to 4.19% (comparison rate includes interest and fees combined). Click here to see details.
Current average interest rate for owner-occupied home loans offered by customer-owned institutions: 4.75%
Current average interest rate for owner-occupied home loans offered by the four big banks: 5.44%
Savings on a 4.75% versus a 5.44% loan: $162 a month based on 25-year, $400,000 loan.*
Note: Loan types are different from lender to lender and may not suit your circumstances. Be sure to understand exactly how the loan works before considering it. See our home loan buying guide
Can you ditch your home loan without paying a fee?
Yes, depending on when you took out the loan. Mortgage exit fees have been banned for loans taken out after 30 June 2011. If you signed on to your mortgage before then, check with your bank about whether they charge exit fees.