Even the Government is suggesting you refinance this month, but why?
For Australians with a home loan, we’re dealing with two major factors that you should know about right now. The first factor is that banks have never been more competitive for your business, and the second factor is that those same banks, ironically, are largely failing to pass on the full rate cuts available, so you’re probably paying your current lender more than necessary in this market. What does this mean for your home loan today? Is haggling worth it?
So, over the last few months the big banks have taken a look at the central bank’s rate cuts and kind of shrugged them off. And now the Treasurer wants answers. Why are big banks refusing to put more in the customers pockets at a time when the Government needs more of us pulling our weight on consumer spending? In Treasurer Josh Frydenberg’s own words, “This is not a good outcome for either their customers or the economy as a whole. People should shop around, get the best deal, but also make their displeasure known to their banks because the rate cuts should be passed on in full, and that would be a good thing for consumers."
How can it be that, with 14 rate cuts before this year only 5 were passed on in full? And with three official rate cuts since January, to a new record low of 0.75 per cent, borrowers are only seeing a fraction of the savings (roughly three-quarters) meaning on average you’re paying $500 more in interest repayments than you could be.
The big four have passed on only 57 of the 75 basis points cut by the Reserve Bank this year. Curiously, there are a few lenders lesser-known than the big four who have passed on the rate cuts in full. And there are some great deals emerging this month.
More of my clients are talking about fixing their rates for the longer term to capitalise on this low-rate environment and locking in some certainty on their repayments. In fact, fixed rates now account for 15 per cent of all new loans. Some lenders are now advertising five-year fixed-rate home loans below 3 per cent. So, for example, on a loan of say $300,000 your principal and interest repayments each week could be under $360!
Will the inquiry into bank rate pricing fix everything?
The watchdog will be asked to look at why new and old customers are treated so differently by banks, it will also look for answers on pricing practices, and question how banks make sure all parties are content, from shareholders to savers and borrowers.
That inquiry is going to take the best part of a year, with the ACCC’s preliminary report due by 30 March next year, six months before the final report. That means we can’t expect any radical change in the short term. So what does the Treasurer recommend borrowers do today?
In the words of The Guardian journalist who wrote an editorial on this topic recently, the enquiry might be a toothless tiger at least in the short term.
“There is not much the ACCC can do about the banks not passing on the full cash rate cut... Everyone loves to hate banks, so it’s a pretty easy political exercise, even if in reality it will likely lead to no change… A major part of the banks’ business model is to assume (rightly it seems) that we are gormless consumers who expect the rate that we have is the best they can offer. Banks act like this because they know most of us just go to one of the big four banks when we need a home loan: We will haggle over buying furniture but not the rate of the loan for the house in which the furniture will be put.”
Talk with your feet, make your displeasure known
In a similar vein, Mr Frydenberg has consistently urged customers to shop around for the best deal and consider taking their business elsewhere if they were not satisfied. And that’s my advice too.
Refinancing is a quick, inobtrusive process that I undertake for you with the aim to get you, in this instance, lower monthly repayments. It’s essentially the process by which you’re swapping your existing loan for a new one, because for many borrowers, the existing loan may no longer have a competitive rate or have the features needed to reduce interest charges. We know this feeling is common in this market.
A side benefit is refinancing if you have existing debts is that we can look at consolidating them. I basically look after all of this for you, your part is to let me know you’re willing to have me shop around on your behalf. In the words of the Treasurer, “The banks have a lot of explaining to do. People should shop around, get the best deal and make their displeasure known to their banks.”
So what about that journalist I quoted earlier in this newsletter, what would he know? Turns out, he has first hand experience it seems.
“For what it is worth, I finally got around to doing this two weeks ago and saw my home loan cut by 0.59% points. A friend then had hers cut by a whole 1% point after hearing what I had done. I have no idea if you will get a rate cut, but I can tell you this – no bank will offer you a deal if you don’t ask.” I’m available to do the haggling for you, just call.