Rumours are circulating that the Big 4 Australian banks could actually put their home loan rates up this year, even if the RBA lowers the official cash rate. Could this be true and what can you do to get prepared?
The sovereign debt crisis in Europe has pushed up the cost of borrowing for banks around the world. The latest report by the World Bank shows that the crisis in the Euro zone is unlikely to improve anytime soon, even suggesting the downturn could be more severe than the GFC. 
Although Australia’s financial markets have fared better than our European and US counterparts, we haven’t been entirely immune. Collectively, Australian financial institutions will need to raise about $96 billion in funding this year from mostly overseas wholesale markets.
“Wholesale funding costs are likely to remain elevated and not fall in a material way given global unrest, sovereign debt concerns and importantly, the supply/demand dynamics of the market”, says Westpac spokeswoman Supreet Gosal. “We continue to monitor the situation closely as it will have an ongoing impact on the offshore funding we source to fund mortgage growth in Australia.” 
So how are the Aussie banks responding to this testing issue? 
One strategy that we’re starting to see is cutting jobs in the financial sector. It’s been reported that Westpac moved 200 positions offshore in 2011 and may be eliminating 600 jobs this year. ANZ will retrench up to 1,000 of its employees.
The Commonwealth Bank took a bold move earlier this week by issuing $3.5 billion in covered bonds – the biggest debt raising so far in Australia’s financial market. According to Roger Bridges head of the fixed income division at Tyndall AM, covered bonds allow banks wider access to European capital markets which can reduce the bank’s funding costs.
Earlier this month, NAB also issued one billion Euros in covered bonds. ANZ recently raised $1.24 billion in covered bonds. Westpac recently announced they would soon be issuing US$20 billion in covered bonds.
Here’s what Westpac had to say about their strategy:
 “…building on the lessons of the GFC, Westpac has been very proactive in managing fund requirements to ensure that we are not as dependent upon volatile offshore markets as we’ve previously been”. 
In this environment, it’s unlikely we’ll see the Big Four pass on any RBA rate cuts in full. At the time of writing, the CBA, Westpac, NAB and ANZ didn’t comment on their future interest rate movements.
However, if you have a home loan with one of the Big 4 banks you should be prepared for the possibility that you won’t get the full benefit (if any) of any decision by the RBA to cut official interest rates.
Given that some economic commentators are predicting the cash rate to fall by a whole 1% by this time next year, that’s a big opportunity cost for big bank borrowers. A 1% interest rate cut could save you thousands of dollars in interest and cut years off the life of your mortgage.
The big banks would be taking a big risk if they refused to pass on rate cuts or even increased rates in spite of the RBA’s position on monetary policy. They would risk losing market share to the cheaper non-bank lenders. This is probably the one thing that could see at least a portion of rate cuts passed on to big bank customers, but don’t hold your breath.
But what about the non-banks? Are they in a similar situation when it comes to their funding in 2012? Australian non-bank loan aggregator RESIMAC reports that non-bank lender funding costs have also increased as a result of the ballooning Euro crisis.
“Prior to the GFC, it was possible to issue three-year Rated Mortgage Backed Securities for 20 basis points over benchmark, now, it’s more like 150 basis points”, says RESIMAC’s Director of Securitisation Mary Ploughman.
However, most non-bank lenders are still hungry to compete against the big banks for a larger share of the home loans market. As a result you can expect most of these lenders to keep their rates a healthy margin below those on offer from the major banks.
If things get really tough there may be times when even non-bank lenders won’t be able to afford to pass on the whole RBA rate cut but it is unlikely they would ever consider putting their rates up out of sync with the RBA.
If you’re ‘hanging out’ for interest rate relief to ease financial stress this year, think again. There is a strong possibility the big banks and perhaps even some smaller, non-bank lenders won’t pass on the whole amount of any cut made to official interest rates by the Reserve Bank of Australia.
That means you’ll need to consider other strategies to make your home loan more affordable:
1. Ask your lender for a better deal. YMO knows lenders are currently prepared to negotiate on rates with new borrowers so if you say you are considering moving to another lender, they may be prepared to offer a better deal
2. Consider refinancing. Talk to a few lenders and a mortgage broker and crunch the numbers carefully to make sure you really will be better off.
3. Look for other areas to improve your finances. Cut back discretionary spending, pay off expensive debts like credit cards and stop using them for new purchases.