During the House of Representatives Standing Committee on Economics’ inquiry into the four major banks (ANZ, Commonwealth Bank of Australia, NAB, and Westpac) last week, each of the chief executives were asked about whether tracked mortgages, which are used in overseas markets such as in the UK, could be applied in this market.
The concept of pegging mortgage rates to the cash rate has been suggested by the committee in the past, as they could “protect customers from interest rate fluctuations that are not genuinely caused by changes to the bank’s cost of funds”, and “offer customers greater transparency and reassurance by behaving as customers expect variable rate mortgages to behave”.
The suggestion is timely, as there have been criticisms by some that the bank’s tardiness in passing on interest rate cuts is making the banks millions of dollars in profits.
However, the leaders of the big four banks had mixed views about the concept.
Speaking at the inquiry, Brian Hartzer, the chief executive of Westpac stood opposed to their introduction, arguing that tracker mortgages could be risky for banks during times of economic hardship.
Saying that they were “fraught, from a risk point of view”, Mr Hartzer argued that although they would be “fine when everything is fine”, he said that “when things are not fine, they can be a real problem”.
Mr Hartzer explained: "When your cost of funds spike dramatically and yet you're unable to reprice your loan book, that's a serious for problem for the bank.”
He gave the example of how tracker mortgages partially contributed to the Northern Rock collapse in the UK during the financial crisis.
According to the chief executive, the premium involved in “managing all the risks inherent in [tracker mortgages] … make that product really unattractive for a customer”.
“We think customers who want certainty are much better served by a fixed rate loan," he added.
Likewise, the group chief executive of NAB, Andrew Thorburn, said that if the major bank were to adopt tracker mortgages, customers would find that the rates for these would be “significantly higher” than those for standard variable rate home loans and would therefore “did not believe there would be significant demand [for such an item] in the Australian marketplace”.
However, ANZ chief executive Shayne Elliott said that there “probably is a market” for tracker loans, but only if customers would be willing to pay a premium for the added stability of them.
Mr Elliott explained that as the bank’s funding is not linked to the Reserve Bank’s cash rate, it would have to charge a premium to counter the risk of offering tracker mortgages.
“It comes down to: ‘Do we think consumers are attracted to it in sufficient volume to make it worthwhile?’” Mr Elliott said.
He added: “We’re not convinced there is a market to pay more for certainty. If people want certainty in Australia they’ve tended to choose they would have a fixed rate …
“Our view would be that generally people are attracted to the headline rate and that, on a like-for-like basis, the tracker rate is going to be more expensive because of that risk.”
Despite this, Mr Elliott said he would not be opposed to a mandate for banks to offer tracker loans.
Speaking for the Commonwealth Bank of Australia, chief executive and managing director Ian Narev agreed that there was “no reason in principle” why the bank couldn’t offer tracker loans, but again — highlighted a lack of demand.
He said: “We would just need to make sure that it didn’t put customers in a more confusing place but no, there’s no reason in principle other than that why we can’t do it.”
Proposals raised ‘merit further substantive consideration’
Following the week of hearings last week, the chief executive of the Australian Bankers’ Association, Steven Münchenberg, commented: “The inquiry this week raised a wide range of important issues, many of which are already being addressed by the federal government or industry initiatives.
“There were also a number of ideas and proposals raised that merit further substantive consideration and the banks will be evaluating these at the next meeting of the ABA Council.
“That said, the banking industry is committed to taking action right now to deal with major issues and deliver better outcomes for customers,” he said.
Mr Münchenberg added that the ABA and the banks intend to set out detailed responses to the matters raised by the committee in the coming weeks, so that the committee would be in a position to finalise its recommendations.
“We believe there is an opportunity to accelerate the timetable on a range of initiatives and we will be exploring this with our members and with the committee, particularly on matters where there is general agreement on the need for action sooner rather than later,” he said.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.