Retirees and savers are wearing the costs of a home loan price war.
Despite the Reserve Bank leaving the cash rate unchanged on Tuesday, banks have slashed rates across a range of products.
New home loan customers benefitted from 36 cuts to variable rates in May (averaging -0.08 per cent), and 220 cuts to fixed rates (averaging -0.36 per cent), according to comparison website Canstar.
But in less cheerful news for savers, nine providers slashed rates on savings accounts.
And term deposit customers experienced even harsher pain, with banks making 156 cuts last week (ranging up to -0.75 per cent) and just 11 rate rises.
Banks are more hungry for borrowers than savers
Canstar financial services executive Steve Mickenbecker attributed the race to the bottom on rates to two key factors.
Mr Mickenbecker said the major banks have been forced to respond to cut-throat competition in the home loan market, with non-major lenders Reduce Home Loans (2.29 per cent), Homestar Finance (2.29 per cent) and Tic:Toc (2.39 per cent) offering variable rates that are more than 30 basis points below any major provider.
As a result, this forces lenders to cut deposit and savings rates to maintain their net interest margin, which is the difference between the price of borrowing and lending and the key driver of bank profits.
“It’s great news if you’re a borrower, not such great news if you’re a depositor,” Mr Mickenbecker told The New Daily.
“Three of the four major banks have lost market share over the last 12 months, and they absolutely would want to claw it back.
“The banks make money by lending and they fund their lending with deposits and wholesale funding, so if wholesale rates keep falling (currently 0.16 per cent for 180-day money), they can say the market interest rates have fallen, therefore they can fund part of their book with cheap wholesale money.”
Mr Mickenbecker said there’s a silver lining for savers, though.
Banks need to maintain their deposit rates so they don’t get downgraded by credit agencies, so that could minimise future cuts, he said.
Booming deposit numbers leave banks complacent
Data from financial regulator APRA shows Australians plunged more than $15 billion into their accounts in April, coinciding with more than $14 billion in withdrawals under the early super access scheme.
RateCity.com.au research director Sally Tindall told The New Daily our increased savings had discouraged banks from paying more interest on our deposits.
“The [banks’] demand for deposits is lessened, so therefore it’s very hard to get a decent rate of return on whatever savings you have,” Ms Tindall said.
That said, it’s still worth shopping around because there are still some semi-decent ongoing rates out there which could suit pensioners whose personal finances are structured differently.”
Ms Tindall said the short-term outlook for savers is bleak, as the RBA has ruled out hiking rates for “some years”.
When will the race to the bottom end?
Despite a chorus of economists urging the RBA to drop interest rates below zero, both Mr Mickenbecker and Ms Tindall believe that is unlikely to happen.
So, if the central bank remains steadfast on rates, what does this mean for savers and home owners?
Mr Mickenbecker believes rates across the board will soon – if they haven’t already – “bottom out”, as banks face little external pressure to make further cuts.
“I don’t see that the banks can actually pass on much in the way of further cuts to home loans or deposit rates,” Mr Mickenbecker said.
Ms Tindall agreed, though she noted some sizeable banks including ING and HSBC are offering market-low, two-year fixed home loan rates, which could encourage others to move.
“If we assume there’s no further cash rate cuts, the competition playing out between the big four banks and challenger banks is really only going to see small cuts from here,” Ms Tindall said.