Aussie banks caught in mortgage squeeze

Australia’s banks are currently engaged in a mortgage war, which is seeing average mortgage rates plummet to record lows of just 3.65% (discount variable) and 2.35% (3-year fixed), according to the RBA:

However, while refinancing borrowers are the big winners from this mortgage war, spare a thought for deposit holders, whose savings rates are being slashed by the banks in a bid to maintain their net interest margins:

Deposit rate cuts accelerated in May and gathered further pace in June and July, with banks slashing their rates on 90 savings accounts in the past month, according to Rate City analysts. Just three savings accounts saw rates lifted in the period.

At least 70 per cent of savings accounts on the market are now paying an ongoing interest rate of less than 1 per cent, according to Rate City.

“Banks are continuing to grind down deposit rates to help balance their books,” RateCity research director Sally Tindall told The Australian.

“Strong competition in the home loan market is forcing the banks to offer cheap mortgage rates, putting pressure on their bottom line.

“Cutting rates for savers helps alleviate some of this pressure.”

The below charts showing average deposits rates illustrate the situation:

And the next chart shows the spread between mortgage rates and deposit rates:

The banks are coping it in the neck on fixed mortgages, but are doing much better on variable mortgages.

The problem facing the RBA is that with bank deposit rates at their lower bound, monetary policy becomes ineffective.

While the RBA can theoretically cut the cash rate by another 0.25%, the banks have minimal wiggle room to cut deposit rates without compressing their net interest margins.

Leith van Onselen
Latest posts by Leith van Onselen (see all)

Comments

  1. GunnamattaMEMBER

    I have been of the long term view that Australia ends up with a ‘bad bank’ somewhere along the line. An institution into which a generations worth of housing speculation detritus is swept, decanted for a while, and then presumably buried or incinerated.

    Of the current big 4, CBA and WBC are overexposed to Sydney, NAB and ANZ to Melbourne. I tend to the view that CBA has better political contacts than the others, making them more expendable.

    My current take is that WBC ANZ and NAB are in the running to become that bad bank, with influential factors likely to be:-

    1. The level of exposure to the markets of greatest crash (Here is looking at Melbourne, but any Opal style construction fluffs may still swing the outcone for Sin City)
    2. How much economically meaningful corporate lending they do before the need for a ‘bad bank’ becomes apparent.
    3. How much sanitary napkin is applied to the sector by Government and RBA (reflecting how much the banks peeve the electorate between now and that moment)

    Against this backdrop any blame apportionment which sticks between Federal (ScoMo & Depressionberg) and State (contrite Dan) becomes mega important.

    If the Feds can pin the blame on Dan they have more scope to look the other way as mortagees get reamed by banks (not that this has happened as yet) or forced to sell – but they wont get much regardless. If Mr contrite can push the line that Aged Care (an utter disaster) and quarantine are Commonwealth responsibilities, then the long lingering whiff of a Banking Royal Commission which has done nothing but leave hickeys on the banks buttocks may ignite into popular hatred in the lead up to the next federal election.

    Throw in some cross border states slinging mud at each other (be it virus, be it quarantine, be it banks) and a fun time is sure to be had for all the family. Those outer Eastern and Northern burbs of Melbourne are looking more incendiary by the moment, but hardly anywhere in Australia is looking flash……..

    And how many seats have our recent elections been won by?

    • All the banks are super connected politically. They after all the black beating heart of our political economy.

      I think the bad bank will be a separate Asset Management Company capitalized by the Commonweath. Either that or Westpac as the most egregiously criminal of the lot (and probably bankrupt already).

    • Gunna, they are all bad banks under your analysis. But the Government can’t let a single Big 4 even look like it is falling over. It can’t even let a second tier bank fall over. Remember WBC buying St George and the guarantee to save Macquarie? The ban on short-selling? The inter-bank lending is so embedded that if one goes they all go. And so does superannuation. The financial gymnastics will blow your mind if there is even an inkling of trouble. The blame game will be an interesting sideshow, but not much else. And if you think the electorate can think further than the end of its Instagram feed, may I present exhibit A for the defence – Mr. Clive Palmer.

      • Stewie GriffinMEMBER

        WBC buying SGB was the greatest rescue of executive share entitlements earned in previous roles, ever performed in Australia or anywhere else in the world.

      • Jumping jack flash

        doesn’t WBC own the insurance company that underwrites LMI or something like that too?

    • Display NameMEMBER

      I think Westpac had the largest investor component. I think in 2017, Haztzer was before a senate inquiry and was asked what percent of IO loans the total mortgage book was. He started dissembling just as his CFO piped up and said 52%.

      You have to wonder what risk model says this makes sense. I thought all these banks ran VAR models and look at their exposure based on movements of rates, assets etc. Clearly the assumptions Westpac were using made no sense at that point.

      • IO isn’t inherently bad, it’s IO in conjunction with LVR that forms the pincer movement. And I don’t know many VaR models that would be able to capture the effects of JobKeeper and early super release, though you can bet there are an awful lot of pointy heads doing that analysis right now!

    • happy valleyMEMBER

      Just imagine the hue and cry from the excess franking credit “refund” zero taxpayer leaners if one or more of the big 4 looked like going down the shoot (probably slightly more more than just a vague possibility now) and the greatest ever gift that John Howard gave the leaners looked threatened – they would be demanding that their LNP saved them from having to cut back on the good things in life. I once had a now ex-friend who acknowledged he would have had to have gone on to the age pension apart from he and his missus picking the right parents and inheriting a juicy $3.0m worth of unencumbered bank and other shares now sitting in their SMSF in pension phase, tell me they were taking risk to “earn” their so deserved excess franking credit “refunds”.

  2. Why on earth would anyone put money in a 3 year term deposit? Put some savings in gold in secure vaulted storage, at least you know over the medium to longer term that the value of your savings should be remain constant. Perth Mint unallocated storage costs are peanuts.

      • And that’s partly because getting an education takes time and effort, and even realising you need an education is not something that most people do. I’m about 8 years into the process and am only just now really starting to see some results

        • darklydrawlMEMBER

          Heh.. And I have paid plenty in ‘tuition’ fees when I have done something dumb too! 🙂 even so, the time and effort invested in learning this stuff has paid back multiple times any losses and costs.

          • Actually the metals are doing well, but it is my share portfolio that is finally seeing some good results, though it got belted today. Oh well, not concerned, I’m pretty sure it’ll be up again soonish given that FINALLY the breadth of stocks going up is much broader than it has ever been. Patience and knowledge is key 🙂

    • I’ve got both, gold and cash deposits.

      The problem with driving interest rates down to nothing is that self-funded retirees, like me, stop spending when our interest incomes fall. That’s a powerful deflationary force. And it’s why driving down rates can be self-defeating for the RBA.

      • I’m the same though not a self funded retiree, but an aspiring house owner. I’ve been pushed out on the risk curve a bit, but there’s not a whole heap that can be down about that except try and educate myself as much as possible. At least my shares are doing ok atm. Anyway I doubt I’d be considered a good candidate for debt unless I changed my work,so we shall see what happens. No reason to stress over it all as you can’t exactly do much in lockdown Vic these days

      • And with each day that (your) demographic grows both organically and with forced lower retirement age.

      • As a single, female, low income part-time worker (have chronic health issues that prevent me from working full time) in her mid forties I take this situation very seriously. I am determined to not be at risk of homelessness in my old age and nor do I want to be at the mercy of landlords (I did that for nearly 2 decades in Beijing and the inflation was brutal, I luckily had the best landlord in the country, a divorced female who didn’t increase my rent much, but you don’t get lucky like that twice in life). in 2012 I put a chunk of my savings into gold and a tiny bit of silver (took possession of less than half which is stored in a non-bank vault I share with my parents, cost of this goes up each year but I think it is worth it). The rest of the pms are in the Perth Mint Depository program. Can buy and sell (haven’t sold any yet) easily over the phone once account is set up. They have introduced new products which I haven’t paid attention to since I started that. I have mine in unallocated storage as I figure they are trustworthy. Last year I pulled half a maturing deposit out of the bank and put it into gold, I needed the AUD gold price to go up $50 an oz to earn the same amt it would have in interest if I had rolled the term deposit for another year. Obviously that was a decision that has more than paid off. I may be buying property in 12-18 months, depending on factors, but if I wasn’t and I was getting a bit concerned about things then I might switch it to allocated (that’s a phone call and a slightly higher storage fee). The rest of my deposit is in an ex credit union bank in their home saver account, and I have some USD cash not in the bank system (converting that to AUD is gonna be a pain with Covid but you win some and lose some). So all up my AUD/USD cash is probably 50%, and I’ve got 50% in PMs (I bought a bit of silver this year, which I am comfortable with, after having done a fair bit of research over several months). If you are going to buy PMs I do suggest you do your own research. There is a lot of info available but there is also a lot of misinformation. You can find some non-emotional good analysts in both north America and Europe. I probably would not have gotten into PMs if I hadn’t lived in China, but seeing Chinese start to buy around the time of the GFC, plus a family history of environmentally destructive sluice prospecting in Vic meant I started to consider it. I got in at the end of the previous bull market so it was painful for a while but I’d done my research and I held my nerve (I’ve developed nerves of steel), plus I didn’t need the money then. Whatever you do, good luck!

        • Put off buying houses in Perth or NSW since 2015 went all in gold and silver. Houses we have been looking at have dropped considerably, our PM holdings have nearly doubled. Perth mint was too easy, it was hard to go against the herd but paying off big time now GLTA

          • Yeah I’m so glad I put money into PMs, it has certainly made the house owning dream more attainable. I’m ok with the volatility as well now too, because I have a much better understanding of the cycle, and how all the different segments interact with each other. Good luck with your goals

        • Good luck Poppy.
          I am so grateful for a debt free roof over our heads. Chronic health issues are not fun( there with you on that one), and severely limit what people can do.
          I’ve been slowly setting up veggies, fruit( dwarf trees where I can),chooks, gaining self sufficiency skills.
          Gives a bit of control back.

        • Like me being priced out of realestate, one becomes a class A expert financial parasite highly attuned to the precious metals markets, in order to preserve wealth from money printing governments and other such miscreants.
          Being a pool minder, you’d sure know not to get out of your depth 😉

        • @popc Like me being priced out of realestate, one becomes a class A expert financial parasite highly attuned to the precious metals markets, in order to preserve wealth from money printing governments and other such miscreants.
          Being a pool minder, you’d sure know not to get out of your depth 😉

      • I’m gonna buy a house.

        But whether or not you want to do that depends a lot on where you live / what city / region – and on your domestic household and employment situation.

        • Good luck to you! I know what I want, half an acre in a small town far away from the influence of a capital city on the eastern side of the Great Dividing Range where the fire risk is tolerable, and where I can grow as much of my own food as possible, have chooks and just live a peaceful, slow life. Funding that is the next part of the equation. I’d be happy to work from home if I could get that work. There’s a bit to go towards the finance side of things, but 2020 has been good to me financially because I was sort of prepared for armageddon. So I’m closer to this reality than I ever have been 🙂 The aim to make progress in a forwards, not backwards direction!

          • Sounds wonderful Poppy.

            Some factors in common with … I want a quarter acre (yes it’s possible) in a small capital city very slightly west of the Great Dividing Range (because our founding fathers were wet blankets and refused to put it on the coast at Jervis Bay …. aaaargh) – where the fire risk is tolerable, and where I can grow some of my own food, have chooks and just live a peaceful life.

            🙂

      • @Robot, depends if it is a house deposit or a home deposit. The semantics of these two words make a world of difference.

          • Awesome, well done. Then the decision comes down to some simple maths, but the subject is captured by a couple of variables that only you can answer.

            The maths mainly revolves around the difference between what you would pay in rent plus the financial return on your investments versus what you would pay in interest and the increase or decrease in the future value. Yes, that may involve taking into account inflation, future house prices etc. but you can isolate some of these variables – long-term (e.g. 20 years) historic CPI for inflation, or a CPI forecast from a trusted source; yield curve for future interest (or lock in a rate for a period); your income and it’s effect on debt serviceability (note that the interest rate is an important variable here); and the all important financial variable – the term.

            If this is genuinely for a home, I would imagine that your term is 5+ years. The reason this becomes important is because when you stress test the model – change the variables to see what happens if certain things change such as a spike in interest rates, losing a job for six months, the impact of a child on living expenses etc – the term will help amortise out any potential decrease in capital value.

            Housing rarely drops to zero in value, so when people talk about markets dropping 10%/20%/50% they are usually talking about sharp falls. In most cases, asset prices recover for a variety of reasons, easily viewable on most longer-term graphs. So if the price drops 20% in year 1, but recovers at 5% per annum on average for four years after that, your net loss at year 5 is 3%. Not a wonderful outcome, but not horrific either. Which leads us to the all important non-financial variable.

            Buying a home is different to buying an investment. Investments should be looked at through cold, hard analysis. A home is where you live. It’s where you come home to and put your feet up at night (or potentially work from in the current environment), it’s where you put goofy pictures on the wall, it’s where you might raise kids or share special moments with a partner (in my experience, the two are mutually exclusive, but that’s a different story…..), it’s where you throw dinner parties in “my/our place”. It’s also where you have to pay for plumbing repairs, buy a new stove, fix the hole in the gyproc where the Airtasker guy bumped the new stove on delivery etc. Only you can decide the importance of this variable – do you want a place of your own, or do you prefer the flexibility and less cumbersome renting option?

            I’ve been to a fair few places in the world, and I have found Australia to have a different attitude to property. There is much more of an investor mindset, which is probably fair enough given the trajectory of prices over the long term in the major metro areas, but the wood is lost amongst the trees, so to speak. If the non-financial variable is low, then look at a potential purchase from a purely financial perspective. Build a model, put in the variables and stress test it. Only buy something when it meets the criteria, and keep your hands in your pocket until then. And if nothing comes up then your decision to rent is justified.

            If the non-financial variable is large, then still build the model (it never ceases to amaze me how little analysis people do on what is usually the largest purchase decision of someone’s life) but take account of what you want personally. You will know where the stress points are in terms of debt serviceability because you have done the work, but you won’t worry so much about whether house prices will tank in the next six months. Well you might, and you might repair the gyproc yourself instead of getting someone in to do it, but you know that it won’t last forever and in the meantime if you want to put that picture up, or knock that false wall out through to the dining area, you can do it without having to ask a landlord.

            If you got this far I know you were looking for a TLDR “buy in three months in this suburb as the market will bottom out” but I’m sure you are aware that its more complicated than that. My only advice in this regard is if you can, buy a house with its own title. The data shows that on average this will be a more robust purchase than strata-titled. I hope you find what you want, whatever that is!

          • RobotSenseiMEMBER

            Thanks for the considered reply Phil.

            To be honest, I’m not 100% certain I will jump into the market at this point (this would be my first home purchase) given everything going on around, from what I’ve read on this site (and many other sources) I can’t imagine buying before the end of the year. I guess my general thoughts were around what I would potentially do with my money for the next 12 months or more should I decide to keep waiting, but I suspect the ability to have cash available rather than sticking it in other products is what might lead me to not get fancy with my money right now.
            I guess I probably fall into the notion of looking at it as a “home”, and as such the cold hard finances (as you’ve pointed out) probably don’t matter as much if I’m keeping myself and someone else happy 99% of the time. But I do like your advice re: the “stress points” – it’s something I haven’t really considered and will probably sit down with the bank people and discuss the best case/worse case scenarios about this.
            Again, thank you for the reply.

          • @Robot, I agree with your sentiments. Any investment that could go up could also go down, and you don’t want the added stress of watching your deposit value move in the opposite direction when you least want it to. Thus, despite all the fantastic investment opportunities, on a short-term (say sub-18 months) time horizon cash is king. Yes, returns are abysmal. But inflation is low so the real value isn’t being eroded too much (if at all) over the short term and you have the certainty of knowing exactly how much you’ve got to play with. There are some really helpful tools out there in terms of budgeting and scenario testing if you’re not into Excel (I’m not affiliated in any way but Map My Plan is one example).

            First home, very exciting – I hope it all goes well for you!

  3. Again, the NAB standard variable is 2.6. Who is paying 3.85?

    WBC offered me 2.75 with offset today, 2.19 fixed 2yr.

    Just parked cash in Macquarie savings @ 2%. None of these silly strings attached like you must spend $3.87 and exactly $3.87 for the first two days of every Blue Moon to qualify but only after you send the bar code in from 10 Reece’s Peanut Butter cup packets (from IGA, not Woolies or Coles).

    • +1.

      2% looks OK at face value at the moment and it’s about as good as I’m getting, but in terms of real inflation I’m not so sure.

      • Well, quite. I guess it’s about as riskless as you can get right now?

        In any case, this is short term for me as it’s a house deposit, and will need it soon. So, parking for 90 days until settlement.

        It’s also a useful account for some rainy day and holiday savings.

    • darklydrawlMEMBER

      “None of these silly strings attached”… I hate those sort of caveats. Who the hell thinks that is a good idea? All it does is annoy your potential customers. *shrugs*…

  4. In a deflationary period and negative real wage growth 2.35 – 3.65 % rates are unattractive. To me. But maybe I’m fussy. Other than the need for shelter, what am I missing?

  5. happy valleyMEMBER

    Depositor r.pe proudly brought to you by your RBA happy clappies and their private bankster mates. Anyway, all that matters to the clappies and the banksters is their IP specufestor and equities portfolios and bonuses powering onwards and upwards. Pass the Cristal and caviar, if you please – popcorn is beneath that lot?