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Banks not passing on better savings rates or not dropping a mortgagor’s loan rate should be countered by Australians ‘switching banks’, the Reserve Bank of Australia (RBA) has encouraged.
Speaking to House of Representatives standing committee on economics last Friday (17 February), RBA governor Philip Lowe and deputy governor Michele Bullock cited record refinancing rates and the inquiry into bank deposit rates, when asked about ‘mortgage pain’ for borrowers.
The issue of bank profits - and media reports of Mr Lowe seemingly endorsing that aspect of the current rising-rate environment - were also raised. Senator Albertus Van Manen asked what work the RBA was doing to have the situation “a bit more balanced, so that the pain could be shared rather than all landing on the borrower.
Mr Lowe clarified: “Well, I was reported as saying, 'Isn't it terrific the banks are getting such profits?' but that isn't what I said.
“I said a country which has strong, resilient, profitable banks is good for the country. I'm not cheering on or excusing the high level of profits, but I think we've got to acknowledge that having a healthy bank system is actually good for the country,” he explained.
Conversely, Mr Lowe contextualised the current situation stating he was “concerned” about the lack of pass-through of the central bank’s cash-rate decisions into higher deposit rates.
“The banks are very quick to pass on [these] into loan rates, but most of them are very slow to pass on to deposit rates, and they need to do better there,” he warned.
“The inquiry the government has just announced; hopefully, [this] will put pressure on them to do that,” he said.
Exercising the right to ‘switch’
In terms of what the average depositor or mortgagor could do to counter financial stress, Mr Lowe gave a frank reminder of the power of a mass exodus.
“The other thing that can put pressure on them to do that [increase deposit rates faster] is that Australians switch,” he highlighted.
“There are bank accounts available at the moment where you need to just put in a couple of hundred dollars a month — that's all — and you'll get an interest rate of four and a half per cent, and it has full transaction capabilities.
“If you're unhappy with the interest rate your bank is paying, go to another one,” he put simply.
“There are some very good deals out there,” he advised.
“You can get easily four per cent above on an at-call, full-functionality deposit account, which you can use with all the modern payment methods. “My advice here is: switch,” he summarised.
“If Australians switch, then the banks have to respond. If there's competition, firms have to respond,” he stated.
Switching and competition is the key
When senator Van Manen re-focused the line of questioning to the pain being felt by home-loan borrowers, Mr Lowe agreed that a similar ‘switch’ tactic for depositors should be applied to mortgagors.
“The other point I want to make is this. Up until our recent increase, the cash rate had gone up 300 basis points—three percentage points,” he highlighted.
“The average rate that people are paying on their mortgages has only gone up 260 basis points. So even though the posted rates that banks are charged have gone up 300 basis points, the actual rates that people pay have gone up substantially less than that,” he explained.
“That's because there's competition for new borrowers and there's this discounting,” he added.
“Again, with people switching, the banks have to respond, and they're doing that. So, of the 300 basis points, only 260 have been passed through into the average mortgage rate.
“That's because of the competition and switching,” he reiterated.
“I encourage people to do it. And in the deposit market, as well, it will have the same effect.”
Record refinancing put into the spotlight
Deputy governor Ms Bullock agreed with Mr Lowe, highlighting the impact that home-loan refinancing was having in reducing mortgage stress.
“I was going to make that point — that actually there is a lot of competition on the borrowing side, particularly for housing,” Ms Bullock said.
“If you look at refinancing rates, they're really, really high.
“People are moving.
“I think this is actually a bit of a contrast to a few years ago, when people didn't really move. They are moving now,” she assessed.
“I think during the pandemic people actually had time to sit down, look at their loans and think, 'I can do a better job of this,' and they're carrying that forward.
“So let's move it onto the deposit side now and start switching there as well, because it works,” Ms Bullock concluded.
Mr Lowe added that there were “some good deals out there,” and that “people should hunt them down and take them.”
“If they do, their finances will be in better shape,” he said.