Westpac has broken ranks with the other three major Australian banks and this country's Reserve bank by slapping an interest rate increase on the home mortgage accounts of it's customers. Mortgage rates moved upward by 0.02 percentage points - to $5.68% and that will cost an extra $600 a year on the average loan.
The bank explains this departure from protocol on the need to satisfy a government demand that all banks increase their liquidity by way of the cash they hold in reserve. This move is supposed to ensure that the banks have a better buffer in case we experience another sudden recession, similar to the meltdown in 2008 which required bailouts.
Now the big question is whether Westpac's three competitors hold the line, or quickly follow suite and raise their interest rates to a similar level. That would be tempting because it is calculated that this 0.02 move will profit Westpac to the tune of $ 1.59 million a day.
Our four major banks are the most profitable banking institutions in the entire world. They are fat and sassy and just maybe they are shooting themselves in the foot by this grab for extra profits. Lending for home mortgages is the basic plank of the banking business and right now the banks have the major portion of Australian lending on their books - but it might not remain that way.
There is no shortage of investment money out there. Interest rates are at a historic low and self funded retirees have difficulty finding a reasonable return to provide the income they need for living expenses. Literally billions of dollars is sitting in small savings accounts which pay no interest at all and in recent times a number of Building Societies and Credit Unions have made the jump and are now officially " banks " !
The way seems clear for these smaller banks to sharpen their margins and offer cheaper mortgage loans to what the big four are providing. A lot of people will remember the situation before the 2008 meltdown. Half a dozen non-bank mortgage lending companies emerged out of the woodwork and started to claim a major share of the mortgage business. They were aggressive advertisers that ran lean and mean business structures and they were willing to shave a few points off interest rates to get the business.
The 2008 meltdown slammed the lid on the money supply and our four major banks seized the opportunity to takeover these competitors, and today those that remain are mere subsidiaries of the big banks and offer rates in tandem. This new hike in interest rates is widening the opportunity for a new breed of mortgage lenders to emerge.
By tradition, home mortgages are probably the safest form of lending in the money world. The collateral is land, bricks and mortar which can be seized in a default and it has the added advantage of being a necessity. There is also safety in numbers. During the 2008 meltdown the number of defaults was infinitesimal compared to the broad acreage of mortgages held by home purchasers - and these few were badly handled by the banks.
In the vast majority of cases, the banks foreclosed - and then did nothing. The property was left vacant. No effort was made to mow the lawns or tend the gardens, and the appearance deteriorated. It was obvious that the banks lacked the expertise to extract a rental return, nor did they seem interested in involving the Real Estate industry to achieve that result. Eventually, all they wanted was to quit the property at a reduced asking price - even if they made a loss on that deal.
The banks have clearly proved that they are clueless once a mortgage requires firm action to deal with collateral. Perhaps this mortgage hike is about to open the doors for a more specialised lender who not only asks for a lower interest rate because of less overhead structure but also has the expertise to manage property in a more expedient manner.
It seems that Westpac has opened the door to major competition !
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