Windfall for homeowners
HOME OWNERS can expect a potential $1200 windfall over the next two years as the big banks hand back some of their out of cycle rate rises, one of the nations’ leading economists says.
The cuts are tipped to spark a fierce battle for control of the lucrative $1.17 trillion mortgage market as the big banks aim to steal market share from rival operators.
National Australia Bank’s Breakup campaign launched on Valentine’s Day 2011, backed up by an increasingly aggressive pricing campaign, resulted in the big players going toe-to-toe on price for a few months.
This comes as a new report calls for the scrapping of stamp duty and a winding back of negative gearing to make housing more affordable.
Deloitte Access Economic partner Chris Richardson is tipping official interest rates will stay on hold but the banks will cut mortgage rates by 0.5 per cent independently of the Reserve Bank - delivering a potential saving of around $100 a month for the average household.
After refusing to pass on all of the central bank’s rate cuts over the past two years, the big banks are under increased pressure to hand some of those gains back.
Since the RBA started cutting interest rates in November 2011 the gap between the standard variable rate being offered by the Big Four Banks and the official cash rate has blown out to its highest level in a decade.
Making home loans a major profit centre of banks’ business models.
"Market forces should result in the big banks off their own bat trimming half a percentage point off the standards variable rate over the next 12 months," Mr Richardson said.
"The RBA will be happy to see mortgage rates drift down as it will be good for the economy with the increase in household spending power."
The big four banks, which are on track to make a combined profit of almost $26 billion this year, currently control almost 85 per cent of the $1.17 trillion home loan market.
Research from the Australian Institute estimates the major banks pocketed an additional $3.7 billion in profits last year as a direct result of refusing to pass on in full the falls in official interest rates.
The banks are estimated to make an annual profit of about $2640 on the average $300,000 mortgage, representing a profit of $79,200 over the lifetime of a 30-year mortgage.
Most economists expect the RBA will leave interest rates on hold at 2.5 per cent for the rest of the year and at present the futures market is giving a less than a 30 per cent chance of another rate cut in this cycle.
But Westpac chief economist Bill Evans is tipping official interest rates could fall to a low of 2 per cent by mid-next year as the Australian dollar remains above US90c on the back of a weak US economy.
February and May 2014 are the most likely times for the next RBA rate cuts, Mr Evans said. Since November 2011, the RBA has lowered the cash rate by 2.25 percentage points to 2.5 per cent. But over the same period, on average, the Big Four dropped their mortgage rates by only 1.87 per cent to a standard variable rate of 5.91 per cent. A cut of 0.25 per cent to the SVR delivers an almost $45 cut to the average monthly repayment on a $300,000 home loan.
The banks and its lobby group the Australian Bankers’ Association are unable to comment on rate moves due to price signalling regulations.