Well, Melbourne Cup has been and gone. I would like to congratulate the “Shocking” team on their good ride to victory.
However, something interesting happened that day as well that concerns every person with a mortgage. The RBA put up their interest rate by 0.25 per cent. This was to lift the overall cash rate to 3.5 per cent.
However I want to talk about the 7th of Oct. You see the RBA on the 7th of October decided to put up their rates on that date. And my home mortgage company increased their interest rate by 0.25 per cent on the 9th of Oct.
It got me thinking. Wow, that was quick, only 2 days to take full effect on my home loan payments. My mind worked overtime as I thought back to when the RBA was putting down interest rates, was my bank following the trend and putting down rates as quickly as two days? I decided to do some investigation on the matter.
I took out my home loan in July of 2005. Between July 2005 and Oct 2009 there have been 14 changes by the RBA to the cash interest rate. Each change has been followed by the bank.
Six of the changes have been putting the interest rates down and 8 have been putting them up. I worked out that on average the bank has taken 3.25 days to put them up. However when putting them down, it has taken on average 11.33 days!
That’s 11.33 days that you are paying additional interest. What is their excuse for taking so long?
It has taken them nearly 2 weeks to get the home loan down. Why would this be the case? Could it be that banks make millions of dollars by keeping the rate as high as possible for as long as possible?
Now this is just my bank and I am yet to look into any of the other banks. But I can assure you that I’m with one of the big four banks.
Now I’m not a banking expert, however to change the rate don’t you just punch some numbers in on a computer? Wouldn’t this be the same as putting it up; except you are taking it down?
You might not think this is very much money. However, let’s pretend a bank has 1000 home loans and each home loan is worth $350,000. This means they have $350,000,000 owed to them.
Let’s pretend that they are earning 5% per year on this money. That means each year they are earning $17,500,000 on their money or $47,945 a day in interest.
If all of a sudden they start getting 4.75% on this $350,000,000 now they are only earning $16,625,000 on their money or $45,547 a day in interest or $2398 less per day.
So if this bank could not change the interest rates for an extra 9 days they would save themselves $21,582. So the amount adds up. Also, if they could do this a couple of times a year, well you have to add that amount to the $21,582.
But this bank is a made up bank with only 1000 home loan customers. However, the big banks have ten of thousands of home loan customers, possibly even hundreds of thousands of home loan customers. This is not small amounts of money with that many customers.
So who pays for this … the home loan customer? We get stuck with the extra interest each year. And while it might not be a lot for us individually as home loan customers, add up the amount and it’s a bucket load for the people lending it to us.
Should there be a law against this … I believe so. I think the government should impose a time line after the RBA moves rates for the banks to move their rates by then. And when I say a time line, I mean a law that states: all interest rate movements must be made within 2 days of the RBA decision.
There it’s that easy, and the banks won’t be able to wait 8, 9 or even 12 days to change their rates down. Pass this on to your friends to get the word out!!!!
Thanks Adam Goulding (Also known as Mr Home Budget) For more information please go to
www.mrhomebudget.com.au
