Interest rates Australia: The big four banks are reluctant to cut rates

Torsten Blackwood/AFP/Getty Images
  • On October 14, the Treasurer Josh Frydenberg launched an ACCC inquiry into the housing market, with a focus on pricing and transparency of home loan rates.
  • APRA data shows that Australians have an addiction to the big four banks, and may be ignoring cheaper home loans from non-major lenders.
  • With interest rates on home loans starting as low as 2.68%, consumer inertia and a lack of financial awareness could be the reason why Australians aren’t switching.

Earlier in the month (October 14), Treasurer Josh Frydenberg directed the Australian Competition and Consumer Commission (ACCC) to conduct a pricing inquiry into the home loan market.

Despite the Prime Minister and the Treasurer encouraging the banks to pass on the three 0.25% rate cuts made this year, many banks have only passed on a portion of these.

What’s important to note is that banks are corporations. They consistently work to achieve a 10 to 15% return on equity (ROE), and the government is asking them to lower their rates when they know this will have a serious impact on their profit margins.

Can we blame the banks for consumer inertia and a lack of financial awareness?

In the Ministerial Direction document to the ACCC, it’s suggested that discrepancies between advertised rates and real costs, product bundling, and barriers created by banks could be stopping customers from refinancing to a new lender with a lower interest rate.

Yet, can the banks be blamed if a lack of financial awareness or consumer inertia are the real cause?

ACCC Chair, Rod Sims, was clear that his focus would be on understanding the consumer’s thought process and increasing financial awareness.

“Having consumers and the community understand how pricing decisions are made, why, and with what consequences is important for a well-functioning market,” he said.

“We have evidence that customers can save considerable money by switching providers, and we want to fully understand what the barriers are that stand in their way.”

Interest rates at historical lows, are Aussies making the switch?

With interest rates as low as 2.68%, Australian mortgagees should be jumping at the chance to refinance their current home loan, and it seems that they are, but there are caveats.

Data from the Australian Bureau of Statistics shows refinancing loans between August 2018 and August 2019 accounted for 33% of all home loans for investors and owner occupiers. This is a 22% increase in comparison to the same period between 2014 and 2015.

Further, ABS data for the month of August this year shows that the rise in lending to households was driven by refinancers, who were predominantly owner occupiers. Up 7.7% since July, the data posits that the effects of monetary policy are in fact encouraging Australians to refinance.

Are these refinancers really getting the best deal?

Whilst the ABS data shows an uplift in refinancing, data from the Australian Prudential Regulation Authority (APRA) suggests that they may not be refinancing to the lowest rate they could.

Rather than opting for cheaper home loans from non-major lenders, it seems Aussies are hesitant to make the switch from the big four.

NAB, Commonwealth Bank (CBA) Westpac and ANZ take home the biggest slice of the Aussie home loan pie, with CBA taking a greater slice than 15 other lenders put together.

Is consumer inertia causing an unfair advantage?

Consumer inertia could be used to explain why many Australians are choosing to stay with a big four bank, even when they refuse to pass on the RBA rate cut in full.

The concept is described by academics as a psychological condition where a consumer will repurchase not because they are loyal, but rather due to situational cues and habits formed over time.

CBA’s Dollarmites program may be the best example of how consumer inertia could be responsible for their market dominance.

Estimated to be worth nearly $10 billion, the program aimed at school children across the nation sees 46% of Australians opening their first account with the Commonwealth Bank, according to consumer group Choice. In fact, a survey conducted last year saw a whopping 34% of these dollarmites still using their first bank account.

So how do we make an informed decision when financial information is so difficult to understand?

Do your own research.

Finance can be a dry topic, but thanks to the digital age, there are a number of aggregators and comparison sites that explain financial concepts and pricing strategies in a way that is easy to understand.

Mortgage Stress Calculators and RBA Rate Trackers can give you the insight you need into the financial market, without needing an economics degree.

However, if you do not want to switch from the big banks, but you want to get a lower rate on your mortgage, there is another option.

Call your bank directly and ask them to pass on the rate cut. This may seem too good to be true, but only those who ask shall receive.

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