Banking: Effie Zahos

Someone will pay for the new levy – customers, shareholders or both

Would you move your home loan if the interest rate increased by 0.15%. In dollar terms that’s around $35 a month extra on a $400,000 loan at 5%. What if the hike was more, say 0.25%. That’s a jump of $59 a month in repayments. I guess the answer really depends on how good your interest rate was to start with and if there was a better one available.

As we were heading to the printers, analysts were suggesting this is how much the big five banks – which were hit with a levy in last month’s budget – would have to reprice their mortgages if they were to offset the full cost (see “Cheat sheet”).

For shareholders, the news isn’t that good either as the levy does represent a cost and, if not offset, it will place dividends under pressure. So far, though, it’s been more a case of investors snapping up bargains, as the five affected stocks regained any losses just days after they took a hit.

Time will certainly tell what impact this levy will have but it’s almost certain that it will be passed onto bank customers. The CEOs of the big four have made this very clear. Shame, really, as this tax is no different from consumers having to pay mortgage insurance, yet these borrowers can’t pass this “tax” onto anybody.

Mortgage insurance exists on risky loans. When a borrower wants more than 80% of the purchase price, the loan is considered a risk and therefore they are charged an insurance premium that protects the lender – not them – if things turn sour. This bank levy is similar in that the government is making banks pay extra for taking on more risk.

Given 80% plus of all mortgages are with the big four, chances are that if you’re a homeowner or even a deposit holder with one of these banks you will be hit.

Kirsty Lamont, from Mozo, says the reason big banks will get away with rate hikes is that they know most customers won’t switch. “Customers might be frustrated for a while but they eventually move on with their lives,” she says.

Which takes me back to my first question: would you move if your loan’s interest rate increased by only 0.15%.

Hate to admit it but I’d probably cop this “lazy tax”. The thought of having to get valuations on our properties and go over my serviceability yet again with a new lender sends shivers up my spine – which is the exact reaction that banks want from us. If the jump were, say, 0.5% then I’d definitely consider moving.

While there are certainly hurdles to moving, the government’s “open banking” regime announced in the budget can only be good news for lazy people like me.

Under the regime, consumers will be allowed to consent to their data being shared with competitors. This will make it easier for consumers to switch to a better-value provider or put them in a better position to negotiate a more competitive deal with their current credit provider. The

regime will also make it easier for banks to tailor pricing to individual customers.

“Banks will have a better understanding of a customer’s financial situation and history and be able to offer customers interest rates based on their risk level,” says Lamont. “Consumers with a better credit rating will be rewarded for their savvy money management with more competitive interest rates.”

It is a case of watch this space. The new bank levy has certainly opened a window of opportunity for smaller banks and nonbank lenders. Lamont says that while the big banks are busy figuring out how to plug the revenue gap left by the levy, smaller lenders not funded by the majors will be taking every opportunity to woo customers with significantly better interest rates.

Finance expert and author of The Great

$20 Adventure, Money’s editor Effie Zahos appears regularly on TV and radio. She started her career in banking.