Just in time for Christmas, the Reserve Bank has lifted rates by 0.25 per cent. The banks have decided to go even further: except for NAB, each has hiked rates by 0.35 per cent or more.
As the table beneath shows, this has created some notable pricing gaps - gaps that will spark increased competition in the housing market, and gaps that can potentially be exploited.
So, why have the banks lifted rates by more than the official increase, and - if you already have a home loan - is it worth chasing discounts by making a switch?
The banks
The reason the banks have gone further than the RBA is the cost of their wholesale term funding. Mostly secured overseas, this funding finances around half Australia's home loans and its cost has increased by about 80 per cent over the past twelve months, with further increases expected in 2010.
The banks say they can't afford to absorb this increase in their own borrowing costs without putting their margins and profits at risk.
When we look at the size of their profits, it's tempting to say 'Bad luck'. But the fact is we need a strong banking system to support the economy, our superannuation funds (through share prices) and Australian tax payers (through taxes on banks' profits). Unfortunately, it's home borrowers who foot the bill.
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Why different rates?
If the banks are in the same boat, it's fair to ask why they're lifting rates by different amounts. The answer boils down to strategy, market focus and funding costs.
Guessing, I'd say that (a) NAB is looking to increase their share of the home loan market, (b) Westpac is looking to attract savers (an important funding source for banks), and (c) both the Commonwealth and ANZ are somewhere in the middle, focused on particular sections of the market rather than growth across the board.
Worth jumping banks?
So, with different rates on offer, is it worth the effort switching banks or are you better off leaving your home loan where it is?
The answer depends on two things: how much you're going to save and how likely the present price gap is to remain.
Moving costs
Switching lenders costs time, effort and money. Assuming there are no break fees on your current loan, setting up a new loan will probably cost between $1,000 and $1,200 in application and legal fees.
Before it's worth doing, you need to make sure you're going to recoup this cost quickly, ideally within six to twelve months. You also want to be sure that any savings are going to continue thereafter.
Using the data above, let's compare the most expensive rate, Westpac's at 6.76 per cent, with the cheapest rate, NAB's at 6.49 per cent. How much would you save, and how long would it take to recoup the cost of switching loans?
So, if you switched on a $300,000 loan you'd save $51 on your monthly repayments - taking you 19 months to recover your costs. On a $500,000 loan, you'd save $84 on your repayments - taking you 12 months to recover your costs.
In both cases, it will be some time before you start to get ahead.
Closing gaps
The other problem with switching loans to take advantage of a gap is that the gap is very likely to close.
Banks cannot afford to forego too much interest revenue for long. While they might be willing to sacrifice their revenues to increase their market share in the short term (six months or less), eventually, their rates will have to move.
In the not too distant future, we're likely to find that the rates offered by different banks are much closer.
For this reason, think carefully before switching loans based on cost alone - you might find that it leaves you worse off.
Before making any move to switch banks, be sure to:
- Do your sums. Check to see what financial savings you'll make and be sure they're worth the effort. Be mindful of what your new lender might do with their pricing in the future.
- Speak to your current lender before moving. In a competitive market, they won't want to lose a good customer and they may be willing to negotiate.
- Hold tight, at least for a few months. By that time, you'll have a better feel for just how sustainable the current pricing gap really is.
Have you ever switched banks or would you consider it? Is it worth switching banks to hunt for the best rates? (Share your views below).
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