While there’s plenty of excitement about how much of the Reserve Bank’s rate cut is or isn’t being passed on by banks to their customers, a bigger question is generally overlooked: Just what are the banks’ real mortgage rates?
The “indicator lending rates” ubiquitously quoted for variable home loans don’t really tell you much at all about what the rates banks are actually offering. Movement in the indicator rates matter to those people who already have a loan, but they are somewhat irrelevant for those looking for a loan or taking the Treasurer’s advice to shop around.
There are big discounts on offer for those who know how to ask and have reasonable credit ratings. Finding out how big is largely up to the individual.
What banks rely on is our very human tendency to suffer from inertia – it’s so much easier just to leave things as they are instead of putting in a little effort to comparison shop and fill out more damned forms. If you don’t ask your bank what the best rate is that they could be offering you, don’t expect them to tell you.
Your local bank manager is happy to play the game of “I’ve managed to get X per cent discount for you” just to make you feel special and beholden, especially when you’re prepared to bundle up all your banking needs in one place with the credit cards and cheque book and a little personal loan there or a term deposit here. Don’t fall for it too quickly though – this is a case where the other fish in the sea are at least worth a close inspection, if not catching.
Start your thinking with the very lowest rates on offer, available from any of the comparison sites, check for any catches and work your way from there.
Your mortgage rate hasn’t always been a matter of Secret Banking Business. As the graph below shows there were simpler times when mortgage rates moved in lockstep with the RBA’s cash rate and the advertised rate tended to be the rate with only a little leeway for a favoured few.
(I was always bemused by the banks that offered a “professional package” – a 50 or 70 point discount for a borrower who happened to have a university degree. Heavens knows what the nation’s wealthy electricians might have thought about that when banks were giving breaks to poor high-risk types with degrees – such as journalists.)
When the RBA began to collect data on what the actual interest rate was on outstanding mortgages in 2000, there wasn’t much difference between that and the headline rate. But then some genuine competition began to set in and a gap opened up and it’s still growing.
My suspicion is that the gap is wider now than ever before for people seeking new loans and that the banks are making fools of us for forever repeating their “headline rate”. Bank XYZ might be saying it is only passing on 20 points of last week’s 25-point cut, but I’ll wager it’s not too hard to get 5 points more discount than would have been the case last year.
There’s not much happening for the banks in the way of lending at the moment. Demand for new home loans is low, so they have to work a bit harder to grab what is available. You’d be mad – or rich, or lazy, or all three – not to make the most of that.