November rate hike - where to from here?
November was a very busy month in the mortgage industry for banks, non-banks, politicians, regulators and our reserve bank alike.
The month’s activities kicked off on Melbourne Cup Day with a 25 basis points (bps) cash rate increase by the RBA. Not to be out done, the CBA quickly announced they would pass on an additional 20 bps to their customers, lifting their variable interest rates by a total of 45bps – but not before CEO, Ralph Norris had boarded his plane for an overseas trip. To cynical spectators, the timing of CBA’s rate hike looked as though they were taking a punt on Bart Cummings’ “So You Think” to win the Cup and keep them off the front page of the newspapers.
“But either way, the fallout of a 45bps rise in interest rates was guaranteed to be massive,” says Scott McWilliam, Homeloans general manager of operations.
Following CBA’s actions, came the politicians weighing into the debate. Shadow Treasurer, Joe Hockey, did not waste any time declaring the current government incompetent, and Treasurer, Wayne Swan used the opportunity to promote his “bank competition package”, due to be released in early December, telling unhappy borrowers to vote with their feet and change their home finance provider.
“The comments made by Treasurer Swan created an unnecessary amount of noise and publicity regarding home loan exit fees, which some banks have subsequently removed,” says McWilliam.
“The exit fees debate is, in part, an effort to distract borrowers from the interest rate hike”, he says.
“Let’s face it, banks are not stupid, if they have to give up tens of millions in fees to generate hundreds of millions in interest income – they will do it!”
Ironically, the only potential loser in the ‘exit fee’ debate is competition and ultimately borrowers. Non-banks generally rely on different types of short term exit fees to provide competitive pricing, products and service.
“Let’s not forget it was non-banks in the early 1990s who undercut the big banks to drive down interest rates and increase competition,” says McWilliam.
Unfortunately the GFC made it difficult for some non-banks to compete on price, which was not helped by the government guarantee which was only offered to banks. But today the non-bank sector is alive and thirsty for new business.
“I encourage all current mortgage borrowers or those thinking about taking out mortgage finance to consider all options, not just the banks, credit unions and building societies,” says McWilliam.
“You’ll be surprised by the non- bank product offerings”.
ASIC released regulatory guide RG220 in November which relates to early termination fees, unconscionable fees and unfair contracts. In short, lenders must now be able to justify their early termination fees and provide greater disclosure and warnings on those fees that may become payable in the future, e.g. fixed rate break costs. The new legislation is positive news for all borrowers and the mortgage industry.
“As the mortgage industry, politicians and borrowers wait with baited breath for Treasurer Wayne Swan to rollout the new ‘banking competition’ package, one thing is for certain – it will not reduce mortgage interest rates,” says McWilliam.
“The government has proved time and time again they do not and cannot control the cash rate and what the banks will do. That said, I would be very surprised if the RBA increased the cash rate again in February as the banks have effectively added to the monetary tightening policy.”