Commonwealth Bank chief executive Matt Comyn has denied the institution charges a so-called loyalty tax, forcing existing mortgage customers onto higher interest rates to fund lower rates for new customers.
“Does the Commonwealth Bank charge a loyalty tax?” MP Andrew Leigh asked as part of a twice-yearly House Economics Committee grilling of the bosses of the ‘Big Four’ banks.
“No, we do not,” Mr Comyn said.
He added the Commonwealth Bank offered a variable mortgage rate just below 3 per cent to existing customers which was flagged through emails and in the bank’s mobile application.
We don’t seek to distinguish between new and existing customers but we do acknowledge that offers can differ,” he said.
Banks have failed to pass on the full benefit of cuts to the Reserve Bank’s key “cash rate”, accused of profiteering at the expense of millions of home loan customers.
Facing questions by members of Parliament from across the political spectrum, the CEO of our second-largest institution, Westpac, Brian Hartzer, bit back at suggestions the bank’s customers paid a loyalty tax.
“The amount people are paying for loans right now is the lowest we have seen in our professional lifetime,” he said.
Mr Hartzer said the different rates reflected a balance between the supply and demand for loans with funding costs over time, while trying to keeps its margins stable.
He argued it would be virtually impossible to reprice the bank’s entire mortgage portfolio given its complexity and the duration of most mortgages.
Soaring power bills forced some state governments to enforce “default offers” — essentially a low, set price.
Mr Hartzer pushed back against any suggestions the bank should be “experimenting” with a similar system for mortgages.
“It could lead to less price competition over time,” he said.
What you are essentially talking about is repricing our entire loan book … the consequences may not lead to lower prices.
“Any customer can call up at any time and discuss their rates … we don’t make it difficult to switch [banks] or call up.”
Interest rate pain
Interest rates are a point of pain for the banks.
The Reserve Bank has cut its key cash rate in half since June, down 0.75 percentage points to a historic low of 0.75 per cent.
The figure is used by banks as the basis for their lending calculations, but none of the Big Four have gone close to giving the full benefit to customers.
This has enraged consumer advocates and politicians, with the Prime Minister accusing the Big Four of “profiteering” and launching an imminent inquiry into the Commonwealth Bank, Westpac, ANZ and NAB’s failure to pass on the full benefit of the rate cut to customers with mortgages.
But interest rates are a point of pain for customers too.
Hobart driver and long-time Commonwealth Bank customer Gerardo Erasmo was so enraged by the institution’s failure to pass on the cut, he wrote a letter to bank boss Matt Comyn.
The bank’s response noted the cost of funding and the impact of reduced rates on savers — who are relying on deposits generating interest payments. Those payments are being shredded, with close to a third of the nation’s deposits currently accruing no interest.
That didn’t satisfy Mr Erasmo.
“It’s an excuse, a false excuse,” he said.
They respond to me negatively, saying that [home loan customers] are not the priority to reduce the interest … it is a very misleading attitude and very immoral attitude towards the whole community.”
Loyalty tax options
Interest rate analyst Sally Tindall has sympathy for customers like Mr Erasmo, but also for the situation the major banks are in.
“Over 50 per cent of banks’ home loan ‘books’ are typically funded by deposits, so when the Reserve Bank cuts the cash rate what usually happens is that banks adjust interest rates for both depositors and savers,” Ms Tindall said.
“The problem in this low-rate environment is that a lot of deposit accounts are at zero, or very close to zero, and the banks cannot pass on a full rate cut to them.
“So banks are passing on a partial cut to home-loan borrowers and then chipping away at the bonus rates on savings accounts.”
Ms Tindall, the research director at RateCity, said banks were pushing existing customers away by extracting a loyalty tax as they attempted to increase market share of new loans.
“I think a lot of Australians would rightly feel a bit ripped off that as an existing loyal customer they’re paying more than a new one.
“But the great thing about being on a variable rate is that you’re well within your rights to take your business down the street to someone that’s willing to offer you a better deal.”
That’s exactly what Mr Erasmo has done. He was being charged more than 5 per cent per annum on two loans, for the house he lives in and an investment property. After switching, he’s paying 3 per cent on both and will save more than $120,000 over the life of the loans.
And he has some choice words for the Commonwealth Bank boss, and his level of understanding of the cost-of-living pressures home owners feel.
“He doesn’t know the reality of life,” he said. “He can’t be a real CEO when he’s denied the reality. He lives in there, in a bubble, he doesn’t consider anything – here’s the proof.”
Interest rates — and the banks’ response to them — will remain a hot topic, beyond the conclusion of the inquiry.