Matt Martino, Colin Gourlay and Ben Spraggon | ABC Business| 5 October 2016
When the Reserve Bank of Australia announces an interest rate cut, all eyes turn immediately to the big banks to see if they’ll follow suit.
This month, the RBA decided to leave interest rates on hold but since November 2011, the RBA has cut the cash rate 12 times without raising it — for a total of 3.25 per cent worth of cuts.
While the banks have often passed on those full rate cuts, they never pass it on straight away and each day that they don’t adds to the financial charges of a mortgage.
Furthermore, while the banks are always in the spotlight around the time of the RBA’s announcement, few people pay attention when they raise rates at other times. All four big banks have done that least twice in the past five years.
If you have a mortgage with the big four, these decisions have added to your interest bill. But just how much?
ABC News has modelled the effect of these factors to find out how much extra Australians have been paying as a result of the banks’ decisions.
There are 4 ways the banks’ decisions affect interest payments
And only one of them benefits those who are borrowing.
The key situations where the banks’ decisions have had an impact on mortgages are:
- Additional interest charged due to the banks raising rates out of sync with the RBA.
- Additional interest charged due to delays in the banks passing on RBA cuts.
- Additional interest charged due to the banks not passing on the full RBA cut.
- Interest charges not levied due to the banks passing on more than the full cut (which only Westpac and ANZ have done over the past five years).
1. Raising rates out of cycle
Much publicity is given to the big banks’ decisions around the time of the RBA’s interest rate announcements, but far less is given to the interest rate decisions the banks make outside of these times.
In February 2012, the RBA left the cash rate on hold but all four big banks raised their interest rates, to varying degrees.
ANZ raised its rates by the lowest amount at 0.6 per cent, but raised them again by another 0.6 per cent in April of that year, whilst the others remained steady.
Then in November 2015, all four big banks raised rates again, by larger amounts as shown on the graph below.
The cumulative additional interest paid on an average mortgage ($300,000) due to these rate rises, excluding ancillary charges levied by the banks, totals more than $2,000 over five years.
2. Delays to passing on RBA cuts
When you take out a loan with one of the big banks, the interest is calculated daily and charged monthly.
So every day that a bank waits to cut interest rates, it is adding to your interest bill.
On average, the banks have waited just over 10 days to cut interest rates after each RBA cut.
The worst offender since November 2011 has been Westpac, which waited an average of 13.5 days to cut rates in full or part after the RBA lowered the cash rate.
This was followed by ANZ at 10.3 days, Commonwealth at 10 days; NAB was the best of the big four, at eight days.
On an average mortgage of $300,000, these delays would have cost Australians up to an extra $338.
3. Passing on only part of RBA cuts
Infamously, the banks sometimes failed to pass on the RBA’s full cut.
Of the 12 announcements the RBA has made in the past five years, NAB failed to pass on the full cut after seven of them.
Commonwealth and Westpac failed to pass on the full cut six times, while ANZ failed to pass on the full cut five times.
The impact of these decisions on an average mortgage can be more than $5,000 in additional interest repayments.
4. Passing on more than RBA cuts
It should be mentioned, however, that two banks have on occasion passed on more than the RBA’s full cut.
In August 2013 and February 2015, Westpac cut its standard variable interest rate by 0.28 per cent, when the RBA had only cut rates by 0.25 per cent on each occasion.
And in May 2013, ANZ cut its rate by 0.27 per cent — 0.02 per cent above the RBA’s cut of 0.25 per cent.
In Westpac’s case, the interest saved was more than enough to nullify the effect of the bank’s delays in cutting rates: a borrower with an average mortgage would have saved about $420.
Here’s what that all adds up to
These factors add up and compound upon each other over time to deliver more money to the banks, and less to your pocket.
Each bank has made different decisions regarding interest rates over the five years, and if you had a mortgage with one of the big banks, your average mortgage has been charged at least an additional $5,126 in interest repayments, or around $1,000 a year.
The RBA model for each bank removes any interest rate rises made by the bank, and passes on the full cut to the consumer on the same day as the RBA cuts the cash rate.
However, it is important to note that these figures are the difference between what the banks did and the cuts that the RBA made.
Some banks, such as NAB, started with a lower interest rate, and therefore may have had less room to move downwards when the RBA made cuts.
Indeed, if you took out an average mortgage with NAB in November 2011, you still would have paid less in interest repayments than you would have with any of the other big banks.
Westpac levies the highest amount in interest repayments over five years — a full $1,625.59 more than NAB.
Why am I being charged extra?
Banks, like any other business, have a cost base with a number of different factors — and the RBA’s cash rate is just one of them.
When a business’s costs increase, the business may choose to pass that cost on to their customers, as the banks have over the past five years at different times.
“Banks respond to changes in their cost base, like any business, and often changes in the cash rate don’t reflect changes in the bank’s cost base,” said Associate Professor Tony Webber, an economist at the University of Sydney.
“Changes in the cash rate reflect RBA expectations about inflation whereas changes in banks’ unit cost reflect changes in the likelihood of debt default, staff wage costs, wholesale interest rates, return on owned assets, etc. They also reflect competition in retail banking and the bank’s view of the sensitivity of loan demand to changes in rates.”
When the big banks increased their standard variable rates in February 2012, for example, each one of them cited international funding costs as the reason, as well as increased competition on term deposit rates in Australia, which meant that the banks were paying more for the funds they were borrowing.
The banks often also cite increased regulatory costs as a reason for not passing on the full cut, as some of them did after the RBA cut the cash rate to record lows in August of this year.
This calculator puts a dollar value on the big banks’ interest rate decisions over the past five years relative to the RBA’s cash rate decisions, but does not take into account other costs to the banks such as these.
However, when the bank doesn’t follow the RBA, it typically means more money in their pocket, and less money in yours.
How was this calculated?
ABC News dug into the media release archives of the big four banks back to 2008 (which was the earliest point in which all banks had archives online) to find out by how much and on which dates they changed their rates.
Using this data, we built a model for each bank based on the interest rate decisions they made in the real world, revealing what would have happened to the interest charges on a given mortgage over that period of time.
We assumed that the repayment that the customer makes was recalculated every time there was an interest rate cut or rise and was paid at the end of each month, with the interest calculated daily and charged monthly, though some customers prefer to continue paying a higher amount, which would lead to them paying off their mortgage faster.
The repayment was calculated such that the mortgage holder would pay off both the interest and principle over the life of the loan.
This was then compared to a theoretical calculation on what would have happened to the interest charges on the same mortgage if the bank had passed on the full cut on the day the RBA changed the cash rate, without raising interest rates out of cycle with the RBA at any time, yielding the total amounts above.
The start point for this calculation was November 2011, which was first of a string of cuts that the RBA has made to the cash rate to date without any intervening raises.
Our calculator allows the input of different mortgage sizes, starting years (back to 2008) and loan terms, but it only calculates the differences between the bank and the RBA over the past five years.