Interest rates

[Bearman]

Just thought I'd dig this up now there's talk interest rates will probably drop now that consumer spending has virtually stopped!!

The banks are now saying if the RBA does cut interest rates the banks will not necessarily pass on the whole cut or any at all!! One bank spokesperson has said now that they have effectively de-coupled from the RBA they can do what they like.

DIRTY ROTTEN SCUMBAGS (The swear filter won't allow me to vent my true feelings).

I knew we would NEVER get back the extra interest rate rises the banks imposed but to withold any RBA cuts is downright disgraceful!!

We have been screwed over BIG TIME!!

[SB076]

Originally Posted by cycle myth

The "extra interest rates" by the banks aren't shyte - they are real and there will be more because they have been absorbing some of the increase in costs.

Bank profits / healthy financial institutions are a good thing - you wouldn't want the implications of the opposite.

Lets hope that there is no investigation into fees as the government will demonstrate their wisdom with a complicated legislation that will increase costs by the banks that we will have to wear.

Watch out for non-bank lenders fees of 1% of your mortgage amount are far greater than the stuff all $700 most of the big 4 charge.

Thats why there has been a strong swing back to the majors.

Correct me if I am wrong - I have been advised that the reason why bank interest rates have gone up independent of the RBA, is that they have been sourcing funds from overseas as they received a better deal that they got from the RBA? Now with the credit issues overseas the deals are not as good as they were so hence the banks have passed on the increases.

My problem with this is that we didnt receive discounts when they sourced funds from overseas. So why are they expecting us to bail them out now. They took on a risk to make extra profit - which is fine, however if things change (and they have) they should wear the consequences of their actions

[Duke]

You're right SB - but this is business, not about doing customers favours. they exist to make a profit.

Bearman, you may find that healthy competition will address your concerns about rate decreases. let's hope so anyway.

[XR06T]

i also would asume it would be cheap to get money from overseas.. hasn't japan just raised their interest rates to a whopping .5%??

not that i know how international economics works..

[cycle myth]

Yes - banks obtain funding from multiple sources.

This includes overseas, other banks, bonds and also the local RBA in the form of Commonwealth Government Securities (ie what drives the local cash rate).

This is to mitigate risk.

By not doing this they would need to factor in even greater margin to cover it and we would pay more or they would go broke - either not a good result.

Borrowing money from overseas (i.e. Japan) has risks too as the bank needs to pay it back in the local current and it might move.

Guys - rates are relatively cheap right now <10%, the banks are healthy, this is not a bad situation until the economy goes up the ....

[GTPete]

The banks are offering 8% plus on your money, so its obvious they cant source funds for less. Shows how tight the cash market must be.

Current Com Bank Investment Rates
of 24 months (Interest paid Annually or Compound Annually)
Invest $10,000 to less than $500,000
8.30% per annum

[Lukeyson]

this is a dumb question i know, but i am not a fan of economics.
But, when the rate goes up, the extra profit goes to the bank, or the govt?

[GTPete]

Originally Posted by XR8fella

this is a dumb question i know, but i am not a fan of economics.
But, when the rate goes up, the extra profit goes to the bank, or the govt?

The banks are not unlike any of us that want to make a dollar. You make money when you buy not when you sell.
If the banks can pay you 8% then they have to sell at 8% + to make a dollar.
Hence interest rates for home loans and other finance is at 8.5+%. To maintain current margins the banks need to increase rates or source funds at a lower rate. If they cant buy cash at sub 8% then we have to pay more for home loans and other finance.
Im not an authority on this but from what I know theres two basic ways that they draw cash. Fixed rate and flexible rate. If your on a fixed rate loan then the bank has secured the funds that you have drawn at a lower rate. They have paid less for these funds then what you are paying and its locked in for the term of the loan. Obvious maths!
The problem area from what I can see is variable rate loans.
Anyone on a variable rate has to ride the market roller coaster for good or bad at the banks descretion.

Right now the banks could easily take a hit here on our behalf but their share price will head south quickly. So if the CEO and his exec's are going to survive on massive annual incomes then theres only one option you and I have to pay higher interest rates.
From where they sit its us or them. Unfortunately we are the them!

[cycle myth]

Who gets the profit - well if its done right - no one!

The RBA would set rates based on the underlying economy.

I.e. as inflation increases then rates will usually follow - for at least 2 reasons:

The first is the higher the interest rate then people spend less and the economy cools down.

The second is that $100 in 1 years time is worth $90 now when rates are @ 10%.

So if inflation is at say 9% there is no way the Government will sell it bills at less as it means it would be losing money by issuing bills. The banks buy the bills and need to add a portion for their profit, a bit to cover bad debts, operating costs........

UNLESS of course the economy is in the poo and then the government WANTS to inspire lending and temps people with low interest (i.e Japan).

Short answer - inflation eats it.

[MITCHAY]

All I know is that when I buy a house I hope the economics of it all favour me. Wishfull thinking I know, but I'm busting my and saving big time :

[ls f6]

Originally Posted by Bearman

Just thought I'd dig this up now there's talk interest rates will probably drop now that consumer spending has virtually stopped!!

The banks are now saying if the RBA does cut interest rates the banks will not necessarily pass on the whole cut or any at all!! One bank spokesperson has said now that they have effectively de-coupled from the RBA they can do what they like.

DIRTY ROTTEN SCUMBAGS (The swear filter won't allow me to vent my true feelings).

I knew we would NEVER get back the extra interest rate rises the banks imposed but to withold any RBA cuts is downright disgraceful!!

We have been screwed over BIG TIME!!

That is a completely ill informed comment.

Since deregulation of the banking industry in the 1980s, banks' net interest margins (ie the difference between what the banks pay for funding, and what they in turn charge you, the end borrower, for said funding), has decreased consistently and dramatically.

In 1993, the RBA's official cash rate was 5.25%pa, and the banks' average variable housing rate was 9.50%pa. ie a net interest margin of 4.25%!
(Source: RBA Bulletin F1, F5; figures as at June 2004)

In 1999, the official cash rate was 4.75%pa, versus the banks' average variable housing rate of 6.55%pa. ie net interest margin of 1.80%pa.


Today, the RBA official cash rate is 7.25%. A typical housing loan rate is 8.91% - see below
The average punter with total lending of $250,000 or greater with the ANZ, CBA, NAB, Westpac, St George or Suncorp are paying an average of 8.90 - 8.95% pa on their variable housing loans
(typical example: Westpac Standard Variable Rate 9.61% - Premier Advantage Package standard 'discount' 0.70%pa = 8.91%pa actual rate).

ie a 'profit' margin today over the official cash rate of 1.66% (after applying the 'discretionary' rate rises this year).
Compared to a margin of 4.25% in 1993.

The examples above also don't take into account the fact that even the AA rated Australian 'big banks' are currently having to pay at least 100 basis points ABOVE the RBA cash rate for wholesale funding in these times, due to international funding drying up due to the liquidity crisis emanating from the USA and Europe.

The net interest margin has steadily decreased year on year, due to competition from bank and non-bank lenders alike. Every man and their dog gets package 'discounts' these days, that 15 years ago were not offered at all, and five years ago were offered only to the wealthy.

So in answer to being 'screwed over big time' and 'never getting the rate rises back' - the banks are making far less off each dollar they lend to Australians now, than they were 5, 10 and 20 years ago.

(the commonly used term 'RBA official cash rate' refers to the Target Cash Overnight Money Market Rate.
It is set by the RBA board to assist with "maintaining conditions in the money market so as to keep the cash rate at or near an operating target decided by the Board. The cash rate is the rate charged on overnight loans between financial intermediaries. It has a powerful influence on other interest rates and forms the base on which the structure of interest rates in the economy is built."

ie the official cash rate is a policy tool that guides the cost of funds (lenders/wholesale funders in turn add risk margins to actual funds exchanged).

[HUNTER8]

[QUOTE=ls f6]That is a completely ill informed comment.

So in answer to being 'screwed over big time' and 'never getting the rate rises back' - the banks are making far less off each dollar they lend to Australians now, than they were 5, 10 and 20 years ago.

In isolation that looks true but you need to take into account the fee income earned by the Banks as well which has grown considerably since the early 90's. Just in the example you quoted there is a "package fee" of $300 or so a year.
The only reason those margins dropped was because of the competition offered by the non banks (i.e. Aussie) and new lenders into the market. The current credit crunch has seem a lot of them back off of their home loan lending which leaves the big 4 to do virtualyy what they like.
The big 4 banks are currently using the crunch to regain market share and try to squeeze some players out of the market. You will also find that they will use this period to pad their margins out again.
Read the final 5 comments in this interview and make up your own mind...........
http://www.abc.net.au/insidebusiness...7/s2288982.htm

[ls f6]

"In isolation that looks true but you need to take into account the fee income earned by the Banks as well which has grown considerably since the early 90's. Just in the example you quoted there is a "package fee" of $300 or so a year."

The $395 annual package fee equates to 0.158%pa on a loan of $250,000. It doesn't materially affect the comparison.

Additionally, as stated, my example only compares the variable interest rate paid by the average Australian versus the RBA official cash rate.

The actual net interest margin is significantly less than this, because the 'spread' paid by the banks over and above the RBA official cash rate is significantly higher the historical average.

In fact, considering someone under that very package will pay no establishment fee, no valuation fee, no settlement fee and no documentation fees, the bank fee component of a home loan with the majors is considerably less than what it would have cost to establish the equivalent loan in 1993.


"The only reason those margins dropped was because of the competition offered by the non banks (i.e. Aussie) and new lenders into the market."

Which is exactly what I said.

"The current credit crunch has seem a lot of them back off of their home loan lending which leaves the big 4 to do virtualyy what they like.
The big 4 banks are currently using the crunch to regain market share and try to squeeze some players out of the market."

On the contrary, the big 4 banks are being far choosier WHO they will lend to in light of the credit crunch - rather than sell a loan to ever Tom, Dick & Harry, they are looking far more closely at their credit settings, rather than write unprofitable business for the sake of increasing market share.

If the big four were trying to squeeze players out of the market, they would NOT have increased their rates outside of the RBA cycle, but rather left them unchanged until said non-bankers lenders, who have a higher cost of funds, withered and died, and then cleaned up the spoils afterwards.

"You will also find that they will use this period to pad their margins out again."

The reason for the collapse of non-bank lenders, is because they are priced out of the market due to the fact that they can not raise wholesale funding at a price low enough to offer housing finance that is competive with the big banks.

If banks were to engage in unrealistic price gouging, they would simply be pricing non-bank lenders back INTO the market.


"Read the final 5 comments in this interview and make up your own mind..........."

The final 5 comments are from the CEO of a non-bank lender struggling to remain afloat because they can't raise funds and offer housing funding at a rate low enough to compete with the banks.

Hardly an unbiased source.

[gz1]

Originally Posted by ls f6

ie a 'profit' margin today over the official cash rate of 1.66% (after applying the 'discretionary' rate rises this year).
Compared to a margin of 4.25% in 1993.

I'm not taking either side as I know SFA about banks, however using your figures above:
1993 average mortgage was $60,000 @ margin of 4.25% == $2550/yr profit
today avg mortgage is $250,000 @ margin of 1.66% == $4150/yr profit
now consider that today there are a lot of mortgages over 500k and some even over $1M. that would have been unheard of 15 years ago.
Still thing the banks are doing it poor?..

[Romulus]

Look at their profit margins. It speaks for itself. With exception of NAB and ANZ, but that's their own fault - but the consumer will pay for their fault.

[Yellow_Festiva]

Well, I think many factors are at play. Lack of competition is high on that list of factors...

If banks were hurting so much they would show a downturn in profits over previous years. Has this as yet happened? I'm curious actually.

The Aussie banks cannot use the sub prime crises forever. All over the radio today "Recession predicted for 2009"....

For the older people here, what happened during the time of "The recession we had to have" in terms of RBA rates compared to actual variable rates??

In times of recession, do house prices drop? I work in an industry where my employment is generally secure, and am looking to purchase more realestate late this year or early 09.

It's a very interesting situation actually. Rents are going through the roof, yet if interest rates / food / petrol continue to climb, or even hold steady house prices may level out or drop.

But by how much, and for how long?

Interesting times ahead......

[HUNTER8]

[QUOTE=ls f6][

The final 5 comments are from the CEO of a non-bank lender struggling to remain afloat because they can't raise funds and offer housing funding at a rate low enough to compete with the banks.

Hardly an unbiased source.[/QUOTE]

Martin North, Fujitsu Consulting.........worldwide company...........hardly a biased source.

Challenger Group..........hardly struggling to stay afloat.


[B] The final 5 comments are from the CEO of a non-bank lender struggling to remain afloat because they can't raise funds and offer housing funding at a rate low enough to compete with the banks.

The $395 annual package fee equates to 0.158%pa on a loan of $250,000. It doesn't materially affect the comparison.

Most certainly does. Monthly repayments to Westpac on your $250000 loan $2028 pm a Challenger backed loan ( you know that one struggling to compete) no upfront/no monthly package fees $2015 pm.
ING Bank (non big 4) no monthly/package fees $2010 pm

[cycle myth]

....... (sigh)!


I don't think showing low detailed payment comparisons actually proves anything or contributes to the original thread topic.

To advertise here I think you need to be a sponsor.

I can understand the frustration in the view that because of large profits that banks are gouging - fact is large businesses make large profits as a reflection of the value of the business.

If the banks are gouging and are so lucrative why have the share prices tumbled?

[HUNTER8]

[QUOTE=cycle myth]....... (sigh)!


I don't think showing low detailed payment comparisons actually proves anything or contributes to the original thread topic.

Certainly does because you can't and never have been able to look at an interest rate as the sole factor in the cost of a given loan. And those figures were in response to an example quoted.

To advertise here I think you need to be a sponsor.

Who's advertising? Sorry, can't see the point of that comment.

[cycle myth]

... sorry I'm not going to perpetuate the ignorance.

[HUNTER8]

Whatever...............