9 December 2011
So a couple days ago (Tuesday 6th December 2011) the RBA cut interest rates by 0.25% as was broadly expected by most in the market. Less expected was the announcement by ANZ that they will be reviewing their variable interest rates monthly – on the second Friday of every month to be precise.
This is a significant development, and, if a similar approach is adopted by the balance of the big four banks, then we are probably witnessing the most significant change to home loan variable interest rate pricing that we have seen in recent times.
MyRate reviews our rates regularly with our funder in order to ensure that we continue to remain highly competitive, for all borrowers, through tough economic times. What this exercise has shown us is that cost of funds is highly volatile (“cost of funds” refers to the margin or interest that banks and other lenders pay to the wholesale investors who lend them money to on-lend to borrowers, ie, if banks were traditional retailers like Target or Kmart, their cost of funds would be equivalent to a retailers cost price they pay to suppliers).
The reality is that variances to the cost of funds pricing that lenders pay is driven primarily by global market conditions and less so by changes to the RBA official cash rate. As such, if the RBA cuts rates by 0.25% but the rest of the world struggles to contain the European debt crisis, the cost of funds to the banks may in fact increases 0.15% despite the RBA cut … yet the banks customers all expect the “RBA rate cut cost saving” to be passed on.
Now, I am certainly not defending the banks – they have massive overheads that require them to build in sufficient margin to their products which increases the rate their end borrowers pay – but they do still struggle to match consumer expectation in regards to RBA rate movements, with the reality that their cost of funds is driven more by other market events. This challenge is the same for all lenders.
Regular rate reviews will break the cycle of consumer expectation regarding RBA rate cuts and will likely make RBA rate cut announcements insignificant to the man in the street. This will likely drive more consumers to the certainty of fixed rate products or will simply mean that consumers will become more accustomed to their home loan rate really being variable.
Either way, with no end in sight to global market turmoil, regular rate reviews will have a significant impact on consumer expectations, even if rates themselves move less regularly.
… oh the times they are a changin’…
