Chapter 5
Home loan interest rates
Introduction
5.1
There is a widespread belief that banks' lending rates should follow
(and only follow) movements in the RBA's policy rate, the 'cash rate'. This
belief is especially strong for home loans where it has been reinforced by the
banks generally behaving in this way for a number of years (Chart 5.1[1]).
(The view is also held for small business rates[2]
although this attracts less attention.)
Chart 5.1: RBA cash
rate and bank's variable home loan rate
Source: Associate Professor Steven Keen, Submission 63, p 3.
5.2
Some customers hold this view very strongly:
As for the arrogance of banks that increase mortgage rates
over and above the RBA... this is beyond belief.[3]
5.3
The increase in home loan rates beyond the Reserve Bank's latest 25
basis point increase in its 'cash rate' on Melbourne Cup Day 2010 attracted
particular ire. A recent opinion poll showed that 79 per cent of respondents
would support 'government regulation to limit bank interest charges to the
level set by the RBA'.[4]
5.4
This belief of customers has developed as a result of the banks' actions
over recent years:
On one hand banks keep saying that there funding costs are
disjointed from RBA cash rate as most of their funding is done through
purchased funds in international and domestic market...banks however, invariably
change their home lending rates as RBA cash rate changes.[5]
5.5
This pattern is, however, the result of an unusual amount of stability
in financial conditions over that period rather than being an innate feature of
banking operations. As the Reserve Bank Governor explained:
...market funding costs do not move in this environment
one-for-one with the cash rate. In fact, the period of time in which they did
was historically rather unusual. It lasted 10 or 12 years. But if you went back
prior to that period the association of mortgage rates with the cash rate was
actually much looser.[6]
5.6
Some bank CEOs accepted that the banks had created this misperception by
sheltering behind the RBA decisions when they raised interest rates on home
loans:
The banks have made a problem for themselves here by
continually moving in line with the Reserve Bank... The reality is that that is
not the driver of our funding but we have, for many, many years, created that
perception in the public’s mind, so we have got to face the fact that this is
something we have created through our own poor communication on the issue...I
certainly do not blame the public at the moment for being upset about moves
they see as not in line with the RBA.[7]
The fact that the banks have moved their interest rates in
line with the RBA adjustments has led to the understanding of the public that
there must be a connection, and that is quite understandable. So I think we
have created that problem for ourselves...[8]
5.7
One bank CEO blamed the non-bank mortgage lenders:
...the perception of a nexus between the RBA cash rate and
housing loan rates needs to be broken...The perception came about as a result of
non‑bank lenders entering the home loan market. These lenders used the securitisation
market to fund their loans and the securitisation market provided these funds
based on...bank bill rates...[which] reflect the market expectation of the cash
rate...Banks, erroneously in my view, elected to compete with these originators
on price and were therefore led down the path of also changing pricing as
official rates changed.[9]
5.8
The belief that home loan interest rates should be related to the RBA's
cash rate led one submitter to suggest banks be required to justify any greater
increases:
A National Interest Rate Accord built on an annual National
Interest Rate Case is the answer. If banks want to raise mortgage interest
rates above and beyond the RBA's, they should be forced to justify one-off
moves to an independent authority...Private health insurers, which just like the
banks enjoy enormous protection and support from government policy, have to
justify premium rises, although that process has been watered down far too
much.[10]
Banks' cost of funds
5.9
The banks indeed argue that less than half of their costs of funds vary
with the cash rate.[11]
Large proportions of bank lending are funded by overseas borrowing. Almost a
tenth of deposits pay no or low interest.[12]
A significant proportion of funds is longer-term and so only very gradually
adjusts to movements in short-term interest rates (Charts 5.2 and 5.3).
Chart 5.2:
Composition of Australian banks' funding (% of funding)
Source: Reserve Bank of Australia, Financial
Stability Review, February 2011, p. 46. (Update of chart included in
Heritage Building Society, Submission 113, p 2)
Chart 5.3:
Composition of bank funding
Source: Australian Bankers' Association, Submission
76, p 82.
5.10
An academic witness stated at the hearing:
There is
no reason the banks should follow the Reserve Bank cash rate...[13]
5.11
In his submission he elaborated:
The [Reserve] Bank Board sets only one interest rate—the cash
rate. This is the interbank rate, the rate at which deposits in the banks’
Exchange Settlement Accounts are traded. These deposits are usually of the
order of $1bn, a tiny percentage of total bank liabilities. The suggestion of
the critics is that if the RBA reduces the cash rate, the banks have somehow
received a benefit which they are selfishly refusing to pass on to their
customers. In fact, they have received no benefit at all. Of course, RBA cash
rate decisions affect longer-term interest rates, but these are determined by
market interest rate expectations...And it is these longer-term market rates
which determine banks’ cost of funds and, therefore, the rates they can charge
customers.[14]
5.12
Since the GFC the banks have made increasing use of longer-term funding (Charts
5.2 and 5.3) which, given yield curves generally slope up, is usually more
expensive.[15]
In part this is a response to pressure from supervisors and ratings agencies:
The announcement of new global standards for liquidity by the
Basel Committee in December...has contributed to this. Banking institutions will
need to have sufficient high-quality liquid assets to survive an acute stress
scenario lasting for one month. Increasing the share of funding from longer‑term
debt can reduce the size of the liquidity portfolio that needs to be held under
that scenario.[16]
These developments partly reflect a reassessment of risk in
the post-GFC environment. They are also in anticipation of regulatory change in
the post GFC environment, including new international standards on bank
liquidity to be fully implemented by 2015.[17]
...we have put in place far more longer-term funding. This has
been done to protect the AA rating, which is so important for the banks, and
also at the behest of APRA...[18]
5.13
But it also reflects changes in the banks' own thinking:
... our overall stance that we need to be more conservative,
having learnt lessons from the GFC.[19]
5.14
The increased use of longer-term funding raised the average cost of
funding. The banks have drawn attention in particular to the increased cost of
term deposits, relative to the cash rate.[20]
Chart 5.4 shows the large increase
in 2009, which now appears to have stabilised:
A consequence of the banks’ efforts to change their funding
patterns has been stronger competition in the deposit market in recent years.
Deposit rates remain at or around historically high spreads to money market
rates, although the intensity of competition for term deposits may have abated somewhat
in the second half of 2010 as banks’ funding pressures have eased; it might now
be that much of the adjustment from lower-rate to higher rate deposit accounts
has run its course.[21]
Chart 5.4: Major
banks' deposit rates
Source: Reserve Bank of Australia, Financial
Stability Review, March 2011, p 28.
5.15
There has also been discussion about the impact of interest rates
overseas. As offshore borrowings are hedged, however, the cost is not that
different to that of domestic borrowing:
The Group (along with the other Australian banks) hedges the
foreign exchange risk from offshore borrowing in order to deliver AUD funding
to its customer base. Implementing the hedge removes the risk that large swings
in the AUD exchange rate can lead to potential significant losses on offshore
borrowing.[22]
Funds borrowed by Australian banks in offshore markets are
either borrowed in Australian dollars or hedged into Australian dollar
exposures using derivatives. In particular, the ABS’s 2009 Foreign Currency
Exposure release, undertaken on behalf of the RBA, showed that Australian banks
hedged almost all of their foreign currency liabilities. The few unhedged
liabilities were potentially fully hedged ‘naturally’ as they were more than
offset by the banks’ unhedged foreign currency debt assets and foreign equity
investments...Hedging converts the interest rate on offshore debt back to an
Australian dollar interest rate, which, if it were a floating rate, would be
influenced not only by the cash rate but also by changes in the cost of
hedging.[23]
The larger part of offshore borrowing is denominated in
foreign currency with the foreign currency risk being hedged.[24]
5.16
The increase in the cost of various types of funding relative to the
cash rate is shown in Chart 5.5.
Chart 5.5
Source: Reserve Bank of Australia, update of chart in Submission 41,
p. 14.
5.17
For the major banks, the increase in the cost of funds was around 100
basis points. One smaller bank estimated its comparable increase was 130-140
basis points.[25]
5.18
Chart 5.6 shows that after the GFC housing loan interest rates rose by
less than the Reserve Bank's estimate of banks' cost of funds. By contrast
business loan interest rates have been increased by more than the cost of
funds. This suggests banks have become risk-averse and the relative safety of
housing lending has become more attractive to them.
Chart 5.6
Source: Reserve Bank of Australia, update of chart in Submission 41,
p. 15.
5.19
The major banks challenged the Reserve Bank's calculations, arguing that
while 'spot rates have largely stabilised' the banks have to rollover
longer-term funding at rates still well above pre-GFC levels:
...the average cost of our funding book is rising because we
are replacing cheap funding with more expensive funding—certainly, absolutely,
very pleasingly, funding that is below the peaks but still substantially above
the pre-crisis levels.[26]
In our own situation the average cost of funds continues to
rise...and that is because...we are still replacing funds that we brought on board
before the global financial crisis with funds that are now much more expensive.[27]
5.20
This does not explain any discrepancy with the Reserve Bank's calculations,
however, as the RBA is well aware of the banks' need to roll over funds:
...their funding costs on the offshore part of it, the
long-term part, where you borrow at five years—so every year one-fifth of that
funding is replaced; the cost of what you borrowed five years ago is ‘down
here’; the cost of what you are borrowing to replace it with is ‘up here’.[28] So, as each month goes by, a little bit of the old stuff rolls off and the new
stuff rolls on. How big a quantum that is is a matter of estimation—an
empirical estimation, of course—but my guess is that one of the things that is
in their mind is that this is happening each month and, as each month goes by,
there is that small squeeze on their margins.[29]
5.21
As shown in Chart 5.5, the increase in the average cost of longer-term
funding is more than offset by a reduced cost (relative to the cash rate) of
short-term borrowing and deposits.
5.22
The Reserve Bank's charts refer to an average of the banks, so may not
capture the experience of every individual bank, which may be the cause of the
dispute.[30]
There are differences in the cost of funds between banks:
There is some variation in the cost of funding across the
major banks. First, there are differences in funding composition across these
banks. Second, there are some differences across the banks in the rates paid on
particular funding sources; these differences can reflect factors such as
timing of bond issuance, or how strongly a bank is competing for a particular
type of deposit. The major banks’ financial results show that for the 2010
financial year, the average interest rates on the interest-bearing liabilities
of these banks’ Australian operations was between about 4 and 4.7 per cent, a
range of about 70 basis points.[31]
5.23
Credit Union Australia, the largest competitor from the mutual sector,
reported a different recent experience and expectation for funding costs:
...we are seeing funding costs at the moment largely flat over
the last eight to 12 months or that kind of period. So perhaps we have been at
the peak.[32]
Loan rates and the cost of funds
5.24
Professor Sathye suggests that in a competitive market banks' loan
pricing would reflect their average cost of funds.[33]
Asked about this, the Reserve Bank told the Committee:
How banks reprice outstanding loans is likely to be a
significant determinant of whether the bank sets its loan rates on a marginal
cost or average cost basis. In Australia, an increase in the indicator rate
increases rates for both new and existing variable-rate borrowers. On that
basis, we would expect that rates would be set with average funding costs
mainly in mind. In contrast, loans that did not reprice as interest rates move
could be expected to be set with a view to the marginal cost of funding.
Moreover, since the onset of the global financial crisis, banks have become more
concerned about how they fund an increase in their balance sheets, thereby
putting more emphasis on using a marginal funding cost benchmark to assess a
loan proposal.[34]
5.25
The most recent increases to home loan interest rates by the major banks
in excess of the Reserve Bank's adjustment to the cash rate, on Melbourne Cup
Day 2010, continues to cause controversy. Treasury remains critical:
Senator WILLIAMS—Mr Murphy, you were just saying that you
recognise that the cost of funds for the banks has increased. Is that correct?
Mr Murphy—Yes.
Senator WILLIAMS—Does that justify their position to raise
their interest rates outside the Reserve Bank cash rate movement?
Mr Murphy—No, I do not think it does. The cost of funds has
risen significantly from, say, pre GFC. It went up dramatically during the GFC
and it has dropped back down. One of the issues is: what is the time frame in
terms of when costs of funding should be looked at? [35]
He [the Treasurer] has taken the view that it is unjustified.
As I said, there is a range of factors, and I see it easy to come to that
conclusion.[36]
5.26
But importantly the banks increasing their loan rates by more than the
Reserve Bank's adjustment to its cash rate does not mean
that borrowers are paying higher rates on their loans (in any other than a very
short-term sense). The average loan rate is essentially where the Reserve Bank
believes it should be in order to meet its medium-term inflation target. If the
banks expand their margin over the cash rate, then the Reserve Bank will set a lower
cash rate than they would otherwise have set.
5.27
The Governor of the Reserve Bank explained:
But since the middle of 2007 there clearly has been an
increase in their [the banks'] overall costs of funds relative to the cash
rate. That has been reflected in the widening of the margins. It has also been
reflected in the cash rate being roughly, I would say, about 100 points lower
than it would have been, to take account of that margin change and roughly—not
exactly in any given month but roughly speaking—offset it so that the loan
rates in place in the economy are, roughly speaking, about where we think they
ought to be for the macroeconomic management needs that we have. We cannot
finetune this on a month-to-month basis; we could not claim to do that. But over
time, in the broad sweep, the big amounts, roughly speaking, have been offset
by different behaviour by us on the cash rate compared to what we would have
done otherwise.[37]
5.28
The banks' actions may influence the home loan rate relative to other
lending rates. The Reserve Bank does not regard the home loan rate as the only
interest rate that influences economic activity and hence inflation. Higher
interest rates on loans for business will lead them to scale back or defer
their investment decisions. Higher interest rates on deposits encourage
households to save more and so spend less. Higher interest rates on personal
loans will also discourage some consumer spending. Higher interest rates also
have a wealth effect as they reduce asset prices by more heavily discounting
future cash flows. Higher interest rates tend to be associated with a higher
exchange rate, weakening activity in exporting and import-competing industries.
5.29
Conceptually the Reserve Bank can be thought as being concerned with a
weighted average interest rate charged by banks and other ADIs; with the
weights reflecting the importance of the interest rate in influencing activity.[38]
5.30
Australian households have high levels of housing debt (compared to the
past, and increasingly compared to international peers), predominantly at
variable interest rates. This implies that the importance of the link between
movements in the Reserve Bank's policy rate and the interest rate on home loans
is more important now in Australia than in the past or in most other countries.
The much greater media attention given to home loan interest rates amplifies
their importance in influencing consumer sentiment.
5.31
The housing variable loan rate is therefore the most influential rate on
economic activity in Australia and so the dominant influence on it will be the
Reserve Bank's view on how monetary policy needs to be set to achieve the
medium-term inflation target.
5.32
Treasury warn of the unintended consequences of regulating interest
rates on housing loans or other bank loans:
...calls for the Government to regulate lending rates on
particular bank products are quite peculiar. The only certain outcome of any
such regulation would be credit rationing, with some households and businesses
finding it impossible to access credit on reasonable terms. Typically, such
interventions have unsavourary distributional consequences...[39]
The repricing of risk
5.33
Since the GFC, banks have become more attuned to the differences in risk
of different types of loans. As the Governor of the Reserve Bank explained:
...risk has been repriced since early in 2007...Prior to then it
was widely held, I think, that risk was underpriced—that it is to say,
investors demanded relatively little compensation for risk in the returns that
they required on investment. That meant the financial institutions of all types
could get ample funding easily and cheaply... But investors changed their
behaviour in 2007-08. The compensation that they require for taking risk now is
higher.[40]
5.34
As a major bank CEO put it:
Yes, I think we all recognise that risk was mispriced, and
that is one of the reasons we had a GFC.[41]
5.35
One implication of this underpricing of risk was that securitisation was
unusually competitive for a period of time:
Business models that took particular advantage of low-cost
wholesale funding or securitisation were able to provide a very competitive
edge to certain markets, particularly—though not only—markets for mortgage
lending...wholesale funding and securitisation are [now] more expensive. In the
case of securitisation, in addition costs have risen, in part because certain
investors completely exited that market and are very unlikely to return.[42]
(Securitisation is discussed in more detail in Chapter 13.)
5.36
The Governor pointed out that the global reduction in the demand for
risk made wholesale markets a less attractive funding source of banks:
...the strong reliance that many of our institutions, including
the major banks, had on wholesale funding—a lot of it from offshore—came to be
seen as something of a vulnerability. They felt that themselves. They were
under pressure also—from rating agencies and from supervisors and this is
everywhere in the world, not just here—to have a higher share of the assets
funded by deposits, many of which are thought to be more stable.[43]
5.37
The repricing of risk may also explain why banks have increased interest
rates on small business loans by more than on housing loans, as illustrated by
Chart 5.6 and Chart 6.3.
Measuring home loan interest rates
5.38
There are complications in measuring the average home loan interest
rate.
'Discounts' on home loan rates
5.39
While attention focuses on the banks' advertised or posted indicator
rates for home loans, there has been an increasing tendency for banks to offer
some customers 'discounts' from these rates (Chart 5.7). As the Reserve Bank
explains:
...it has become commonplace for banks to offer borrowers
discounts on indicator rates. Indeed, banks have been advertising these
discounts for a number of years, resulting in almost all borrowers obtaining a
discount of some size. These discounts have increased over time and, on
average, are currently around 60 to 70 basis points.[44]
It has become more common over recent years for borrowers, particularly those
taking out bigger loans, to negotiate larger discounts than those that are
advertised.[45]
Chart 5.7: Variable
housing lending rates (relative to cash rate)
Source: Reserve Bank of Australia, Submission 41, p 15.
5.40
Choice reported that some customers were able to get a better deal just
by asking for it:
...we did some research on this and we found that, with home
loans and also with transaction accounts, when people asked their bank for a
better deal they did get one. Some people even claimed to get a one per cent
reduction in their home loan—not many, but a few claimed that they got that.[46]
5.41
The Reserve Bank commented:
The discounts were used by the banks to compete for new
business while minimising the foregone interest of lower effective interest rates
on their existing housing loan portfolios.[47]
Lenders finance a wide spectrum of credit risks so it is
appropriate that borrowers with varying risk characteristics are charged
different rates. The size and prevalence of discounts will also reflect the profitability
of the customer’s current and potential relationship with the lender, as well
as credit conditions at the time of origination.[48]
5.42
The variation between posted indicator rates and actual rates charged has
the disadvantage of clouding price comparisons. It is not enough to compare the
readily available information on indicator rates. It is also necessary to
assess which lenders may be willing to make larger reductions in the
negotiation process. Arguably this advantages borrowers who go through a broker
rather than shop around for a loan themselves.
Effective variable mortgage rates
5.43
The interest rate is, of course, not the only relevant cost of a
mortgage. Establishment, service and exit fees also need to be taken into
account. The Reserve Bank estimates that 'on a $250 000 mortgage held for up to
three years, for instance, these fees are estimated to add, on average, about
30 basis points a year'.
5.44
Chart 5.8 compares rates charged by various lenders including these
fees.
Chart 5.8: Effective
variable mortgage rates
Source: Reserve Bank of Australia, Submission 41, p 16.
International comparison
5.45
While there are always difficulties in obtaining exactly comparable
data, the best measures available suggest that the margin of home loan interest
rates over central bank policy rates in Australia is around the middle of the
range of that in comparable countries (Chart 5.9)
Chart 5.9: Interest
margins on variable rate mortgages
Source: Reserve Bank of Australia, Submission 41, p 16.
5.46
The ABA present data showing the gap between the central bank policy
rate and the interest rate charged on five-year fixed interest home loans is
between 2 and 3 per cent in Australia, Canada, New Zealand and the United
Kingdom.[49]
Tying home loan interest rates to the Reserve Bank's policy rate
5.47
Professor Sathye has suggested that the interest rate on home loans
should be a fixed margin over the Reserve Bank's official cash rate.[50]
A problem with this idea is that in extreme market conditions, such as occurred
during the global financial crisis, a bank's cost of funds may go well above
the cash rate (Chart 5.5) and potentially they could be making a loss on the
loans.
5.48
Professor Sathye's suggestion has some similarities with that proposed
in the Banking Amendment (Keeping Banks Accountable) Bill 2009, which would
have required that that if a bank moves interest rates contrary to movements in
official interest rates, the treasurer could remove its access to government
guarantees of its deposits. The Committee recommended that the Senate not pass
that bill, as:
...it is concerned that the bill may discourage banks from
competing in reducing interest rates, could lead to higher bank fees and/or
reduced lending to homebuyers, could raise doubts about the deposit guarantees
and so reduce confidence in the safety of bank deposits and could be perceived
as politicising the setting of bank interest rates.[51]
Variable versus fixed interest rate
loans
5.49
Australia is unusual in having most of its home loans with interest
rates variable at the bank's discretion.[52]
Indeed, some submitters argued that banks should not be allowed to vary
interest rates on home loans.[53]
5.50
More common are either fixed rates or adjustable rates tied to some
market indicator interest rate.[54]
5.51
The Reserve Bank commented:
The Australian housing loan market is characterised by
relatively limited use of fixed-rate loans by international standards.
Historically, more than three-quarters of housing loans have been written with
a variable interest rate, and most of the remaining share have rates that are
fixed for less than five years. While Australian households will, as a result
of this behaviour, generally bear more interest rate risk on their mortgage
debt compared to households in other countries, this is partly offset by
providing households with greater flexibility. In particular, when interest
rates fall to low levels, many households tend to take the opportunity to make
additional principal repayments. In contrast to variable-rate loans, fixed rate
loans almost always have restrictions on prepayments. The greater prevalence of
variable-rate loans in Australia is, in part, likely to be influenced by the
fact that these loans provide borrowers with greater flexibility in making prepayments,
with Australian borrowers valuing this feature, given that owner-occupier
interest payments are not tax deductible as they are in a number of other
countries. Also, the greater prevalence of variable rate loans increases the
effectiveness of monetary policy, as the bulk of households is affected quickly
by changes in interest rates. This means that, other things equal, the Reserve
Bank needs to move the cash rate less than might otherwise be the case.[55]
Were lenders to offer such products, they are likely to carry
a slightly higher interest rate as compensation to the lender for taking on the
risk that funding costs might rise more quickly than the cash rate (that is,
the lender is providing the borrower with an option) .[56]
5.52
Reserve Bank economist Luci Ellis elaborates:
Mortgage interest deductibility affects the capacity to
service debt and the incentives to repay principal. This in turn affects
incentives to take mortgages with fixed versus variable interest rates. When
interest payments are not deductible, mortgage borrowers are effectively paying
their mortgage out of post-tax income. This implies that the post-tax return to
paying down the mortgage will generally exceed the post-tax return on investing
in financial assets, providing an incentive to pay down the mortgage rapidly if
possible. Such an incentive encourages the use of variable-rate mortgages,
which are less likely to involve prepayment penalties.[57]
5.53
The reason for this prevalence of variable rate mortgages may just be
inertia dating back to the days of controlled interest rates:
...it goes back to the dim, dark ages of history when interest
rates were controlled by government, and therefore to borrow you never had to
bother about what interest rates were. You knew it would be at the ceiling set
by the government. We removed that ceiling on housing loan interest rates but
we did not ask whether the current institutional structure of loan contracts
appropriate for the new environment.[58]
5.54
As a result of the use of variable rate mortgages in the Australian
market, the risk of interest rate variability is borne by households rather
than banks. It could well be argued that banks are better placed than
households to bear this risk:
...an interest rate which is variable at the lender’s
discretion...is also undesirable from a risk-sharing perspective in terms of who
is better able to bear the risk of changes in banks’ funding costs and in terms
of the availability of information.[59]
'Fixed interest gap' or 'tracker'
mortgages
5.55
A bill currently before Parliament requires banks to offer a 'fixed
interest gap' (sometimes know as a 'tracker') mortgage product. This is a
mortgage where the interest rate charged is adjusted to maintain a fixed
percentage (set at the time of the loan) above the lender's cost of funds.
Banks would be required to get the approval of APRA for the formula they use to
calculate their costs of funds.
5.56
Senator Bob Brown explains the motivation:
These mortgages will protect customers from interest rate
fluctuations that are not genuinely caused by changes to the bank's cost of
funds...these mortgages will offer customers greater transparency and reassurance
by behaving as customers expect variable rate mortgages to behave.[60]
5.57
The bill would not preclude banks also continuing to offer their current
variable rate loans where they retain discretion to vary the rate charged.
5.58
Such 'tracker' products are offered in the United Kingdom. The Reserve
Bank commented:
While ‘tracker’ or benchmarked products can provide
informational benefits for borrowers and potentially provide lenders with a
smoother margin on their mortgage book, these products are not without
limitations. In the United Kingdom, for example, the spread between new tracker
rates and the policy rate has increased sharply, rising by more than the UK
standard variable rate.[61]
Chart 5.10: UK variable
housing lending rates (relative to cash rate equivalent)
Source: Reserve Bank of Australia, Submission 41, p 17.
5.59
Some submitters want to go further than this bill. Professor Kevin Davis
wants to:
Prohibit loan contracts which give lenders absolute
discretion to change the interest rate on existing loans.[62]
5.60
The Australian Bankers' Association reject the idea:
...demand for such a product is unknown, yet banks and other
ADIs would be subjected to additional costs in developing, launching and
administering the product that would add cost to all lending. We note that
there are a number of recent examples of policy driven products that have not
proven to be commercial viable, or have not attracted consumer interest, or
have subsequently been cancelled. If a commercially viable market existed in
Australia for such a mortgage, we consider that one or more of the 111
institutions marketing home loans would have provided this product.[63]
5.61
The ABA is apparently unaware that there is (at least) one ADI offering
such a product. Queensland Teachers Credit Union offer a 'tracker' mortgage
loan where the applicable rate only moves in line with changes in the Reserve
Bank's cash rate. They comment on it:
This product creates certainty and surety for consumers and,
at the same time, provides transparency. Not only does it provide demonstrable
benefits for consumers, it conforms to the social and political objectives of
the Government.[64]
5.62
They note that their ability to make the tracker loans is constrained by
problems in the securitisation market:
...due to current securitisation requirements in relation to
the ability to reprice mortgage loans, this type of loan does not conform and
is therefore ineligible for securitisation,...[65]
5.63
The ANZ Bank is currently considering how a tracker product might work
in practice.[66]
5.64
Asked about any prudential concerns, APRA responded:
In APRA's view, there is a substantial implicit interest rate
risk in such a product, when ADI funding costs increase more than the reference
rate. The problem was notable, among other examples, with United Kingdom
'tracker' loans during the global financial crisis. If home loan rates were to
be tied to the cash rate or other rates not controlled by the lending institution,
the ADI may be required to hold additional capital against the extra risks.[67]
Committee view
5.65
The Committee concludes that the Reserve Bank's policy rate is only one
influence on banks' cost of funds. It is therefore not reasonable to expect
that banks' variable interest rates on housing loans should always and only
move in parallel with changes in the Reserve Bank's policy rate. It welcomes
the initiative by some lenders to provide 'tracker loans' with such an explicit
linkage for those borrowers who desire this certainty.
5.66
The Committee does not support regulatory controls on home loan interest
rates, or interest rates in general, but instead suggests in following chapters
measures that will increase competitive pressures.
Navigation: Previous Page | Contents | Next Page