Record profits but banks still lift mortgage rates beyond RBA moves

As they rack up record profits, two of Australia’s largest banks have raised interest rates outside of the Reserve Bank of Australia’s monthly official cash rate adjustment cycle.

Commonwealth Bank of Australia (CBA) has increased the variable rate on its no-frills home loan for new owner-occupiers and investors with deposits of 30 per cent or more. The bank has also hiked its 1- to 3-year fixed rates for owner-occupiers and investors.

NAB’s rate rise targeted those who could least afford it but in the eyes of the bank present the greatest risk. It increased its basic variable home loan for new customers but only lifted the rate for loans with smaller deposits of 20 per cent or less.

The moves come soon after the two banks had clocked up record or above-forecast profits.

CBA earned a record $5.1 billion profit for the second half of 2022. NAB’s $2.15 billion profit for the fourth quarter of 2022 was, like CBA’s, a quarter of a billion dollars above fourth quarter expectations.

CBA new customer rate changes – for owner-occupiers paying principal and interest

Source: RateCity.com.au. Note: above fixed rates are for borrowers taking out a package home loan with a $395 annual fee.

The banks’ profits are in direct contrast to the floundering finances of an increasing proportion of Australian households.

Savvy’s Mortgage Stress Survey 2023 found that there had been a sharp rise in the number of people adjusting their spending habits to meet mortgage repayments.

It found that 38 per cent of Australians will spend less and prioritise the mortgage to make ends meet, up from 27 per cent six months ago. Another 21 per cent of respondents say they haven’t missed repayments but are “under pressure”.

Mark Errichiello, Independent Buyers and Vendors Advocate for Master Advocates, said for some communities and locations where the borrowers or consumers are already struggling to keep up with repayments, including first home buyers, young families with higher living expenses that have increased due to inflation, more hardship was likely.

“There will be some distress to come for many families facing rising rental yields and rising interest rates.

“Those most at risk appear to come from suburbs further out of the city, from new land release locations or oversupplied high rise or high density developments that have not had time to establish and are oversupplied with similar dwellings.

“Households that may only have the one asset and only purchased in recent years without time to establish growth and equity may never realise growth.

“If they are forced to sell and the market declines further as rates rise, they risk the asset being worth less than what they initially paid.”

Mr Errichiello, a Real Estate Institute of Victoria (REIV) Council Delegate, said he witnessed many mortgage sales during and post GFC under similar conditions.

“The less desirable assets performed poorly and suffered the most, while the inner city, more established suburbs and desirable property types weathered the storm better,” he told API Magazine.

‘No merit’ in CBA, NAB rate rises

While the banks claim that increased costs are behind the out-of-cycle- rate rises, Peter James, CEO of Mortgage Ezy, is not convinced, with non-bank lenders' inability or unwillingness to compete harder against the big four banks part of the problem.

“While the Residential Mortgage Backed Security (RMBS) market has seen large increases in costs over and above changes to the RBA this has only really affected non-banks, as authorised deposit-taking institution (ADIs) have genuinely not tapped the professional markets for some years, being awash with cheap money from depositors,” he said.

An RMBS is similar to a bond that pays out based on payments from many individual mortgages. An RMBS can increase profits and decrease risk to investors but can also create great systemic risk if not structured properly.

“While some banks are citing these market influences as an excuse to raise their interest rates with out of cycle increases recently by two of the four majors, in reality there really is no justification for this with every cash rate increase banks have been only passing on a fraction of the RBA adjustment to depositors.

“At the same time they have universally passed every RBA increase in full to borrowers thus increasing their margins and generating record profits.

“With costs blowing out by between 0.7% and 1% for the non-banks over the past year, unfortunately they have been unable to provide the meaningful competition to ‘keep the banks honest’ as they have done in the past.

“This uneven playing field has delivered yet another free kick to the banks, with huge sums dropping to their bottom line, at the worst period for borrowers struggling with massive interest rate hikes and cost of living pressures,” Mr James told API Magazine.

Downsizing in response to debt burden

For those in financial stress, downsizing shapes as an option to alleviate the debt burden.

A finance expert predicts that worsening conditions this year will trigger older Australians to make the downsize move sooner, while also giving rise to a new, younger demographic of ‘downsizers’ – those who could soon be facing mortgage stress and who are at risk of no longer being able to service their loan.

Aaron Bassin, CEO, Bridgit, said many older Australians are asset rich but income poor, with their money tied up in the value of their property.

“In the past they would have considered downsizing to a smaller property because their children had moved out and to cut down on home maintenance, however, with the current economic environment I believe we will see a large cohort choose to make their downsize sooner than planned, to free up their equity in order to support them with the rising cost of living, avoid the requirements to pay an increasing mortgage and live the lifestyle they are looking for.”

Mr Bassin’s comments are in response to research revealing more than 600,000 households planned to downsize to a smaller property between June 2022 and 2023.

“The pension age, which was 65 just five years ago, is set to increase to 67 this July, suggesting Australians are working longer to build up their super and to support the higher cost of living.

“But not everyone will be able to or want to work for longer and instead, we’ll see older homeowners downsize sooner and take advantage of the financial incentives available to them, such as tax exemptions and recent changes to superannuation benefits.”

Justifying banks' rate rises

CBA also raised interest rates on its digital Unloan mortgage by 0.3 per cent, which is more than the Reserve Bank’s quarter of a percentage point move in February.

CBA said the hit on new and existing customers was in response to investor pressure to be more disciplined on loan pricing.

Analysts have warned home loan profitability is under pressure from intense competition as lenders battle hard amid slumping property prices.

Atlas Funds Management portfolio manager Hugh Dive was quoted in the media as saying higher rates were in response to funding pressures.

“They’re all facing higher wholesale funding costs and rising political pressures, so it’s not unexpected to have to increase rates a little bit,” Mr Dive said.

“The others will surely follow CBA.”

Big four banks basic variable home loans – for owner-occupiers paying principal and interest

Source: RateCity.com.au

The banks’ consistency in passing on RBA rate hikes immediately while dithering over passing on rate cuts or rate hikes to savers has long been a source of anguish to customers but is now on the radar of the Australian Competition and Consumer Commission (ACCC).

The ACCC has been asked to look into this practice and report back to Federal Treasurer Jim Chalmers by 1 December.

Appearing before Senate estimates last month, RBA governor Philip Lowe defended the banks when asked how struggling renters and mortgage holders should feel about their billions in profits.

“People are really hurting, I understand that, but I also understand that if we don’t get on top of inflation, it means even higher interest rates and more unemployment,” he said.

“The banks are profitable, it’s true; we want resilient banks.

“I know it’s hard for people to accept when they’re suffering but the country is better off having strong, resilient banks that can provide the financial services that we need.”