Guys

I know we've all seen mortgage rates drop dramatically over the recent months and I guess we're all pleased, but is the picture quite so rosy?

After my bank finally wrote to me to advise of the new rates (which was instantly out of date), I decided to review my mortgage payments over the last 18 months or so we've had the mortgage.

One interesting, and slightly alarming feature I've noticed is the differential between CBA base rates and my mortgage rate - I'm now paying just a handful of basis points less than 1% MORE than last year VS base rate. In monthly terms thats 25% more!

All those little 0.1%'s they put on due to cost of borrowing plus not passing all the CBA cuts on to customers has had a significant impact!

Multiplied by every single customer thats a big chunk of change. And it would seem its not just my bank as comparing rates they are all much of muchness.

Oh how I wish I had my tracker mortgage now!

Apologies if this has already been discussed but I've not caught and certainly not seen much commentry in the press about it - yes the incidents of not passing on full cuts, but I never realised it totalled almost 1%

The banks have said that they hope to pass on all the rate cuts when their cost of borrowing drops. They have higher costs borrowing overseas than they used to have.

The alternative is for them to only use domestic money, which would not be sufficient to cover all mortgages.

Not enough people save with the banks any more, it all goes into shares via super.

Well that's good news. It'll be interesting to see how long it takes them!

I guess the surprise was not the fact they're doing it, but just how much it now adds up to.

One thing I have noticed here is that if you are on a variable rate your payments don't automatically drop when the rates drop unless you ask your bank to do it.

Yea - we discovered that. Well pissed off.

And if you don't notice, one day you may find a surprise letter telling you that have paid of your mortage a few years earlier than you expected

Something like the Flexible Mortgages in the UK
http://www.allsortsmortgageadvice.co....html#flexible

I'm not. When it went up we didn't really miss the extra payment so now I am still paying the higher rate - which means my mortgage will be paid off quicker

Welcome to the world of banking

ABC - what you're saying isn't really true.

Deposits are now guaranteed so there's been a lot of flow to the banks from money market and investment funds. They should be using this saving base to imropove their lending rates.

In addition to that there is both an implicit guarantee of overseas borrow and more recently a real facility to issue debt (for a 70bp cost) with a government guarantee. Although rates may be higher in relative terms, those higher yields are also more attractive to investors than government/state debt, as the credit risk is exactly the same (i.e sovereign risk).

So they have two extra advantages of skewed borrowing. They should in turn be passing this on in lending. That they don't is simply because they're not forced to and the lack of competition, not because they can't afford it.

I did say "The banks have said that they hope to pass on all the rate cuts when their cost of borrowing drops"

Things may be changing now with these other changes. Maybe they will at some stage, or maybe they will hold off as long as they can, as you indicate.

Hopefully. I wasn't having a go. Just that a lot of it's psychological - as rates go down people tend to be more inert than they should, as they still see lower mortgage rates. Quite a few non-bank lenders have disappeared too so it would be good to see greater consumer activism to ensure better value from the banks.

And I guess that is my point. With the factors you are proposing re potentially chepaer lending, why aren't the consumers (and media) banging a louder drum about reducing the differential back to 2007 levels.

Why? A generally unquestioning media that doesn't seem to fully investigate/apply constructive criticism to australian bank practice, an inert consumer base - possibly due to lack of information (see above), a protectionist local banking industry, and in this environment a weak political structure that's fearful of doing anything that might be construed as talking down the Australian financial sector (despite the fact there's a big difference between say issues of solvency and simply ripping people off).

I'd like to think it's times like these that would make people more questioning and sceptical, but the opposite seems true unfortunately.

Despite the banks being able to borrow with the AAA Federal government guarantee the cost of borrowing is still at record levels but the glass half full view is that at least they can borrow. BTW Superannuation typically invests in far more than shares and its responsibility for the decline in savings rates in marginal.

Until last mid year there was a huge amount of cash chasing earnings opportunities. The non bank lending sector was able to sell mortgages via brokers and those mortgages were repackaged and sold on to banks, hedge funds etc and then onto investors. This allowed lending to levels way beyond what would be possible with the risk levels banks are allowed to lend at.

Because banks had this cheap access to funds to lend they neglected the savings accounts in favour of lending. Now they cannot get enough of our cash and I have never seen the big 4 push savings accounts like they are now. Compared to those previously cheap funds we are good value now.

Anyone who thinks this is just about confidence needs to look at the root cause of this crisis. Over enthusiastic lending to people and companies who cannot afford to pay back. The long term way back is to pay off those loans and the amount the world overextended itself. It will take a long time to pay back. A bit like if you oversplurge on your credit card several times your income and then have to pay back. The world economy is the same.

There was an interesting report from APRA stating that Australian bank exposure to over inflated housing markets (Western Sydney was mentioned) in 2006 was too high. There was one unnamed bank that was dangerously over exposed. The report was hinting that the local banks pull back their exposure then. Another report I read was that APRA forced Macquarie Bank into its split to raise money capitalise to a safe level again. One thing that makes me wary is that APRA is owned and governed by the banks.