While the four of the five major home lenders have lowered their floating mortgage rates in the wake of declining wholesale interest rates and last week’s Reserve Bank decision to leave the Official Cash Rate unchanged, their profit margins remain unusually fat.
The usual rule of thumb is that the banks will charge between 150 and 200 basis points above the 90-day bank bill rate. With the exception of National Bank which still has a 7.95% floating rate, the major lenders have lowered their floating rates to 7.85%.
With the 90-day bank bills trading between 5.85% and 5.9%, that puts their margins right at the accepted upper limit (and National Bank just over it.)
Mortgage Brokers Association chairman Rob Tucker suggests two reasons for this apparent lack of competitive spirit.
"That’s going to be the maximum you’re going to pay," he says. "They’re negotiating a lot more than they used to. If it’s a good deal, they might whack 50 basis points off the published rate.
"That’s possibly what’s helping the published rates to stay up there, because behind the scenes, they’re not actually there."
The basic condition of the housing market at the moment is that there aren’t enough properties for sale to satisfy demand, Tucker says.
Nevertheless, most existing customers on floating rates are likely to simply accept the published rate.
Another reason there’s less pressure on the banks to lower their floating rates is that a majority of home borrowers take out fixed rate loans and the margins on these loans are far slimmer, Tucker says.
The five main banks are charging between 7.15% and 7.20% for one-year fixed rate loans and 7.55% for three-year fixed rate loans. The key one-year wholesale rate the banks use for pricing these loans is sitting just above 6% while the three-year wholesale rate is about 6.4%, making the banks’ profit margins between 115 and 120 basis points.
"That’s where the margins are cut to the bone," Tucker says.
