Interest rates cuts more than reported

The banks copped a fair old bashing last week while they dithered over the Reserve Bank's rate cut – but I don't remember praise for or even much acknowledgment of them reducing mortgage rates by more than the RBA.

And I don't mean just the fixed rate mortgages that have come down as money market interest rates fell in expectation of official rate cuts. What people actually pay for variable home loan rates has come off considerably more than the official movements over the past year as the banks have indulged in some genuine competition for home loan business.

One of the problems the banks seem to have created for themselves is that the headline variable rate that the media and politicians concentrate on really doesn't mean all that much anymore. As a guide to what people are actually paying for their mortgages, it doesn't tell us anything. (More from Michael Pascoe: Retail Steady As She Goes, Not Sinking)

With big discounts on the "official" variable rates now the norm, all the they're good for is a guide to how rate movements are going for people with existing mortgages, not what new borrowers might be able to negotiate. When the headline rate for the main banks was still around 7.8 per cent, desirable customers with good credit ratings were able to get mortgages starting with a 6 instead of a 7.

Even the Reserve Bank's wonderful statistical service doesn't deliver the goods on the real cost of the average home loan, but there is a hint of what's happened in one of the RBA's interest rate tables under the heading of "discounted" variable rates.

In November last year, straight after the RBA's last official rate increase, the "standard" bank variable mortgage rate was 7.8 per cent and the "discounted" rate was 7.15 while the average three-year fixed rate was 7.35.

After last month's official rate cut, the "standard" rate reduction matched the RBA's cash rate fall to print at 7.55 per cent, but the "discounted" rate was 6.8 per cent and the three-year fixed was down to 6.4 per cent. The discount rate had been cut by 35 points, never mind the 95 point reduction in the fixed rate.

And that's not the half of it. Banks are a little coy about how much discount is on offer just for the asking and a little bargaining. Once upon a time, the advertised rate was what you got – unless you asked. There were all manner of silly discounts for some professions but not others. Just having a degree knocked 10 or 20 points off the standard rate at some banks. (More from Michael Pascoe: Misinterpreting Signals Of Fear And Hope)

Now there's a little more science to it. Individual banks might dress up discount offers in "professional" packages, but what it really comes down to is credit worthiness and how much the institution wants you as a customer.

The one group that still gets a raw deal is the self-employed. For example, the NAB's online outfit, UBank, has a very attractive mortgage – as long as you're employed by someone else. The self-employed didn't get to complete the application form when I checked it out.

It's not hard to imagine the ANZ's move away from making its mortgage rate decisions after RBA meetings could go a lot further. Greater differentiation of customers and their rates could yet see more frequent and different movements in what is charged.

And given our tendency to turn over our mortgages quite often, it's also possible for banks to adjust the cost of their book through the discount they offer new customers rather than blanket movements.

For now though, the banks will be happy to bed down this attempt to escape from the political pressure that comes with RBA movement expectations before attempting anything fancier, but the possibility remains.

And what we end up paying, on average, will still be up to the RBA. Our central bank targets what the end consumer pays and thus keeps moving the cash rate until it gets the outcome it wants. The politicians from both sides who pretend otherwise are just scoring cheap political points or, more worryingly, don't understand how monetary policy works.

For individuals, the trick is to search around to get one of the lower rates that make up the RBA's targeted average.