Banks keep some of RBA's cash rate cuts because borrowers let them

Lately I’ve been asked why banks reduce their mortgage rates less than the Reserve Bank’s cash rate reduction.

And increasingly my answer is: because the borrowers let them.

Almost two weeks ago the cash rate dropped by 0.25 percentage points, and the big banks reduced their mortgage rates by between 0.18 percentage points and 0.2 percentage points. As I write this, just four lenders passed on the full RBA cut: ING Direct, Yellow Brick Road, bankmecu and My Rate. Those rates now sit between 5.49 and 6.19%.

Compare this to the big four banks’ standard variable rate mortgages which are currently sitting between 6.58% and 6.71%.

It’s clear that one group aims to offer competitive rates while the other group is pretty far off the mark.

Yet it’s the group of lenders with the more expensive mortgages that dominates home lending. Our four largest banks account for more than 90% of all new mortgages.

Confidence is the key to this debate.

Post-GFC, most home borrowers don’t want to pick a fight with the organisation that finances their homes.

I understand the reticence. I’m also alarmed at the uncertainty created when consumers cannot see a link between the Reserve’s cash rate and their own mortgages.

I don’t totally blame the government for this. The Reserve Bank is an independent agency charged with running our monetary policy, and a Treasurer should not tinker with the bank’s operations.

Secondly, the Treasurer has made several changes that help borrowers, including banning mortgage exit fees on new home loans, one-page mortgage fact sheets to make it easier for consumers to shop around and covered bonds to give access to cheaper wholesale funding for lenders.

These changes work well on paper, but the lack of confidence among mortgage holders is still the key to the puzzle.

An online poll run by The Age this week – on the back of a Chris Zappone column – showed that 67% of responding mortgage holders would like to move to a small lender, and only 6% want to move to a big bank. The poll was answered by more than 11,000 people.

That’s a huge preference not being acted upon, but what can consumers do? There are good mortgage comparison web sites online and there are excellent mortgage calculators that show you how much you can save by moving to a lower priced lender. You can also use a mortgage broker who will offer expert navigation of the market.

The law is also on your side, in that your current lender should not be able to penalise you for leaving a variable rate mortgage and going to another, depending on when you took out the loan.

It doesn’t seem like it at times, but consumers are more powerful than they think.

Just add some confidence, and they will rule this market again.

Mark Bouris is executive chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting and tax, and insurance.