Cash rates decline – but will your mortgage repayments? As your savings rates certainly will!

Jun 17, 2019

Welcome to FF –

RBA cash Rates are lower now – talk about flow on effects

Today – Will you get mortgage cuts, how your savings will be affected, effects on the job market and wages.

 

Mortgage cuts

• Don’t expect the banks to pass on the Reserve Bank’s rate cuts in full
  • don’t assume your mortgage won’t become more expensive outside any official rate movements.
• That’s the lesson to be learned from a “fascinating” graph that compares how the big four banks have manipulated variable rates against the official interest rate over the last three years.
  • ANZ and Westpac refused demands from both sides of politics to pass on the full 0.25 per cent cut announced by RBA governor Philip Lowe last week.
  • NAB and Commonwealth Bank customers will get the full reduction in their mortgage interest payments
    • but the comparison shouldn’t expect further savings if another expected cut comes later this year.
  • when the Reserve Bank moves down so do the banks but not always by the full amount – the gap is getting wider

each announced they would lower interest rates on mortgages by 0.18 and 0.20 per cent respectively when 0.25% reduction

Bank subsidiaries and second tier banks - St George, Bank of Melbourne, Bank SA and RAMS will pass on a 0.20 per cent cut to their owner-occupier customers.

They are, however, cutting investor interest-only rates above and beyond the RBA by 0.35 per cent.

Suncorp Bank has also announced it will cut all variable home loan interest rates by 0.20 per cent, effective June 21.

Band of Queensland is only passing on 0.15 per cent, and Virgin Money is passing on 0.22 per cent.

ING, Australia’s fifth largest home loan lender, chose to pass the full 0.25 per cent cut on to their variable rate customers, effective June 25, 2019.

 

Why?

• The cash rate reducing cycle went all the way back from November 2011 to August 2016
• the banks to find themselves under a lot of margin pressure when there have been multiple changes in cash rate
• “When the next rate cut comes, it’s going to be harder again for the banks to pass on the full amount, in particular for the banks that passed on the full amount this time around.”
• Also – have multiple sources of funding – it doesn’t all come from Aus – so if money from USA – and their rates go up
  • Doesn’t mean banks can reduce rates

 

Potential savings 4.32% to 4.07%

1. 25% rate cute –
   1. $400k mortgage – 58 savings per month - $21k saved over 30 years
   2. $500k mortgage – 78 savings per month - $26k saved over 30 years

 

How to get – have to shop around – new rates and introductory offers

• best things about being on a variable rate is that you’re well within your rights to take your business elsewhere
• competition – compare what others are offering because ultimately the effective rates of existing loans may not go down much
  • Reduce Home Loans is offering 3.19 per cent, Homestar 3.24 per cent, Mortgage House 3.29 per cent and Athena 3.34 per cent.
  • Do another episode on these online lenders – some are not banks and what to watch out for
• Cheeky banks – even ones making a full cut like CBA and NAB – wait 3 weeks to get
  • Make $108.8 million by delaying the effective date of the cut

 

 

 

Deposit rates – other side of the story -

• Commonwealth Bank and NAB have penalised savers a week after passing on the RBA’s full interest rate cut to borrowers.
  • Both banks have reduced the base rate on their online savings accounts by 0.20 percentage points, leaving them at 0.30 per cent.
  • This leaves savings rates at rock bottom levels, and will put the banks under intense pressure of funding
  • This is due to lower savings if lower rates around being paid
    • Human incentive to want higher returns
  • Also - potential to squeeze profit margins of the banks
    • will be keeping bank executives awake at night – how to meet shareholder demands
  • the prospect of negative interest rates - as seen in other countries is starting to look more likely
    • Where you have to pay the bank to put money into the account
    • See it in either booming black market economies (so much cash not on books, like Miami in 80s)
    • Or in deflationary economies – ones like Japan
  • Unfortunately for savers and in particular self-funded retirees – increased longevity risk – thanks to lower returns on cash
    • Need people to plan out retirements more in advance now

 

Economy and employment

• Share market - The wider financial sector was trading 1.0 per cent lower – thanks to the banks
  • Westpac led the losses with a 1.24 per cent share price decline to $27.78.
• Does this mean the overall market is going to go down? One of two scenarios
  • Money see monkey do – banks lead the market down – so people sell in fear – but unlikely to last long
  • Signs of a struggling economy – lower consumer spending so lower business profits
• After all, the Reserve Bank was just forced to cut interest rates to record lows
  • do that because the economy is going poorly, not because it is going well.
  • Economic growth has been pitiful recently — under 2 per cent for the past year.
  • Wages growth is just 2.4 per cent and if inflation wasn’t so low, wages would be falling in real terms.
  • and the latest job ads plunge confirms that narrative - ANZ job ads series, though, is to find out what hints it contains for the vitally important labour force data — the job ads down about 8%
    • May be flow on effect of things stopping in anticipation of the election – wait and see if pick up
    • decline in the job ads series can give us a bit more certainty that the good times in the unemployment market are behind us
  • the unemployment rate up about 0.3% since low in December
  • underemployment rate - risen due to a surge in part-time work.
• Not good signs - the general atmosphere of gloom around the Australian economy 
  • The retail sector is already in recession, according to the NAB business survey. And the positive post-election vibes around the housing market seem to be wearing off too, with clearance rates slumping back down in the most recent weekend.
  • The labour market is clearly worsening – don’t think it was ever as good as they believed, economists just weren’t paying enough attention to wages and underemployment
  • The RBA used employment as an excuse not to cut rates earlier – but recent developments in the labour market now make them have to change their minds
• Problem with the monetary policy - You want to make rate cuts in advance of the problems cropping up – but it is always done afterwards, because they take time to have their effect.
• Leaves the RBA spending their time catch up by cutting interest rates at least one more time – but may be too little too late
  • If drops of 3% haven’t helped, what will 0.25% do?

 

Summary and what to do:

• Good – slightly cheaper mortgages – slightly more to spend on consumption (or paying loan down)
  • One is good for the economy, while the other is good for the household
• Bad – lower savings, lower margins for the financial sector, signs of slowing growth on
• Shift on the demand for buying higher income payment assets
  • Very low savings – so ‘safe’ blue chip shares are a preference for some
• Credit contraction in the markets is the major risk to a decline in the short term –
  • Banks taking away loans or RBA increasing rates and contracting the money supply

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