This time next year, your mortgage repayments could be lower, some analysts are predicting. Banks often justify raising the interest rates on their mortgage products by pointing to the rising cost of funding these mortgages. But several analysts have told RN Breakfast funding costs for banks look to be heading down over the next six months.
"People with principle-and-interest, owner-occupier home loans will be paying less this time next year than they are today," Shaw and Partners banking analyst Brett Le Mesurier said. The reason why banks are not moving to cut rates now, analysts argue, is because of the big swings we have seen on share and bond markets recently. Those swings are related to developments on many major international macroeconomic and geopolitical fronts, including the US-China trade war, a debt hangover in Europe and the possibility of a hard Brexit. It has made lending a more risky activity, and created a sense of nervousness in the money markets. That has seen banks charging each other more to lend to one another.
"What's happened at the moment is that funding costs have increased, therefore the chance of them cutting their home loan rates across the board is very small at the moment," Mr Le Mesurier added. All four big banks confirmed to RN Breakfast the cost of sourcing money has gone up in the past few months. Westpac told the ABC, "Funding costs are up since November", while ANZ said, "Funding costs have increased again in recent months, resulting in an increase to overall bank-funding costs compared to three months ago".
Banks 'flush' with deposits, pushing rates down
However, while banks draw on a number of different money pools to fund home loans, they mostly rely on deposits. Mozo has a database of Australian bank deposit rates. Mozo banking analyst Peter Marshall said the cost to banks of holding these deposits is currently very low. "There are plenty of products out there that are offering really terrible returns at the moment," Mr Marshall said. The average online interest rate is roughly 1.35 per cent and that is down 0.05 percentage points over the past 12 months. If you add on bank fees and charges, and consider how inflation erodes the value of money, some savers could actually be worse off by putting their money in the bank. "Absolutely, you could be going backwards," Mr Marshall said. "If you're not earning over 2.5 per cent then, yes, you're probably going backwards in your savings." UTS business professor Warren Hogan believes that is likely to remain the case for some time. "[Deposit rates are] historically very low," he observed. "They're almost at levels we've never seen before and I'm not sure if we're going to see much of a material change in that."
Anne Anderson from UBS manages roughly $30 billion of clients' funds in the bank's fixed-income department. She agrees with Mr Hogan. "Banks actually don't need more deposits and that's why rates are falling very modestly," she argued. "Actually I wouldn't say they're rising or falling, they're broadly unchanged. "The banks are flush with cash at the moment because we've all heard the talk that credit growth is slowing and therefore they don't need as much money, so that's one of the reasons why the rates, if they've fallen, have fallen, for that reason."
'Bank funding costs will start to come down'
But banks do not just take money from depositors to provide home loans. They also draw on what is known as the wholesale money market — massive pools of money sourced from other financial institutions and professional investors. Australia has a wholesale money market and there are money markets overseas as well. Professor Hogan argues the cost of borrowing from those markets, given what he predicts will be less anxiety on global markets later this year, will see funding costs fall.
"So I think bank-funding costs will start to come down over the course of the next six months or so." RN Breakfast asked the major banks about their upcoming costs.
The nation's biggest lender, the Commonwealth Bank, said it was just three weeks away from releasing its half-year financial results and so it could not comment any further. ANZ noted price-signalling legislation meant it also could not give additional commentary. RN Breakfast was still waiting for a written response from National Australia Bank. It is important to note that, for some of the smaller lenders, rates are actually increasing. The Bank of Queensland, for example, raised rates last week and said the decision was based on continuing funding-cost pressures and intense competition for term deposits. Anne Anderson warned even if the big four banks were in a position to cut rates, they would be tempted to only drop them by a small amount. "So when we're talking here about the banks easing back, it could be of the order of 10 basis points or something," she said. However, she added any kind of mortgage relief would be welcomed by households. "The Reserve Bank still believes in the cash-flow mechanism," she observed. "If it was required, reducing interest rates supports household balance sheets. "It gives them a cashflow effect, in the absence of wage increases and enables people to pay off debt."
House price falls may trigger rate cut
For the big four banks, though, the biggest wild card remains the Reserve Bank. While deposit rates are expected to remain very low, and there is a chance the cost of other funding sources will come down, if the Reserve Bank lowers its official interest rate there will be enormous social pressure on the banks to also follow suit. Warren Hogan believes there is a one-in-four chance of a rate cut. "The housing market is the key here," he said. "If it continues to deteriorate in the first half of 2019, like it did in the second half of 2018, I think we will get a rate cut. "The falls we have seen in house prices so far, I think the economy will be resilient to — people will look through 5-to-10-per-cent declines in the value of their homes. "If the falls become 15 or 20 per cent, then I think that's going to affect peoples' spending. "They're going to start to think, 'I've just lost five years of savings worth of wealth in the last year, because my house price has fallen, and I therefore am going to delay buying a new car, buying a new fridge, going on a holiday'. "If that affects a lot of consumers — bearing in mind 70 per cent of people own a home, with or without a mortgage — then it could become a macroeconomic event, in which case the RBA would need to respond. "But, at the moment, I'm still of the view the housing market will stabilise in the next few months, but really all eyes on those auction markets come February."
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