But Barrenjoey analyst Jonathan Mott points out the current bout of mortgage competition also has some unusual features.
Normally,banks focus their competitive efforts on attracting new borrowers,by offering the best deals for people who are taking out new loans or switching banks. Banks typically do this by offering new borrowers a bigger discount off their advertised interest rates. It leads to what critics have dubbed a “loyalty tax”:over time you’ll be over-charged if you stay with the same bank and don’t ask for a better rate.
While the banks’ mortgage businesses are getting squeezed,their deposit portfolios have been making big returns.Credit:Photo:Louie Douvis
However,Mott suggests much of the current competition is focused on retaining these existing customers. In a recent note,Mott says the gap between variable mortgage rates paid by existing customers and the RBA cash rate has narrowed by 0.5 percentage points during this cycle of rate rises. Put another way,it implies average variable mortgage rates have risen by 3 percentage points since the RBA started raising last year,well below the 3.5 percentage points in official rate increases. “In effect,the banks have already competed away two rate rises,” Mott writes.
Why would banks suddenly decide to pay more attention to their existing clients?
For one,there’s not much new loan growth,so they need to prevent customers being poached by a rival. Another likely reason is that borrowers are hungrier to save money because of the jump in interest rates and the cost of living. The community is probably also more aware of the banks’ pricing strategies,and the thousands of dollars that can be saved by regularly shopping around.
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Mott suggests more customers are calling in for a better interest rate,and in some cases banks are pre-emptively cutting their rates. If this competition continues,he says it could end up costing the banks about $10 billion a year in foregone revenue.
This prospect of prolonged competition in mortgages is a rather big deal for bankers,who claim new loans are now being written at rates that are below their “cost of capital” – the rate of return demanded by shareholders.
Mott is forecasting the big four’s profits will hit $33 billion this financial year,before falling back to just under $30 billion in the two years after that.
Macquarie analysts have also warned banks could face a hit to their profits of between 15 and 20 per cent,if banks’ entire mortgage portfolios moved to the lower-margin rates being offered today.
To be fair,the threat to banking profits from mortgage competition shouldn’t be overstated.
It’s unlikely to show up in upcoming March half results of Westpac,ANZ or National Australia Bank,which are expected to be strong,thanks to wider margins caused past rate rises flowing through the banks’ books.
And while the banks’ mortgage businesses are getting squeezed,their deposit portfolios have been making big returns because deposit rates did not initially rise by anywhere near as much as the cash rate. Many investors will hope “rational” competition returns,as banks quietly remove some of their most competitive home loan deals from the market.
Another trick the banks have used in the past to beef up home loan profits is repricing:such as only passing on part of an RBA rate cut to borrowers. No bank has dared try this when rates have been rising because of the political backlash it would generate,though Macquarie analysts think banks may well try to reprice again when the RBA eventually starts cutting.
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But for now,banks may have to get used to the stiff competition in mortgages because it’s being driven by long-term forces:a higher interest rate environment,and a greater willingness by borrowers to pick up the phone.
For customers,the clear message is that it’s worth asking for a better deal from your bank if you haven’t done so in a while.
Ross Gittins is on leave.