Despite only around a third of people having a mortgage, the media and Wayne Swan continue to whip up a frenzy expecting banks to shovel cheap debt out their doors.
Unfortunately for the mob, last week was a confusing fizzer.
The RBA didn’t reduce interest rates and the pent up tension ready to be unleashed on the big four had nowhere to go.
If you’re someone regularly outraged over interest rate decisions, here’s an insight into the new banking/mortgage environment.
The profitability of new mortgage lending is declining, yes the banks are still making big profits, but they’re now losing money on new mortgages.
The reason?
Housing credit growth in Australia has fallen from around 15% per annum, to 5.5%.
In the past banks made big profits from slim margins because of the sheer volume of loans they were writing.
With the demand for housing credit falling, those slim margins don’t offer the same profitability they previously did.
You may be aware of low interest rates in other countries, but what matters is the price Australian banks pay to source new funds, and recently that price has been high.
Since November, the big four banks have been raising money by issuing covered bonds at an average of 6.2%, ANZ and NAB have had issuances as high as 6.8%.
And when you compare 6.8% against ANZ and NAB’s discount variable rate, they’re both losing money, something they won’t allow to continue.
Small and negative margins offer no incentive for the banks to write new mortgages.
So while politicians, followed by other self-interested groups, may use the banks to score political points, their increasing rhetoric may force another problem – credit rationing.
Banks will either raise rates to maintain profitability on new loans, or they will begin to pull back from lending to new borrowers and business.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we’re arguably the best financial advisor in Australia.
