Savings rates have banks in a bind on RBA interest rate cuts

RBA governor Philip Lowe. Picture: AAP

If, as tipped, the RBA cuts official interest rates again next week, Australia could have its first ever mortgage rates starting with the number two, which is yet more bad news for the banks.

Already borrowers can get no frills mortgages from the likes of ING at 3.14 per cent, HSBC at 3.17 per cent and Macquarie at 3.24 per cent.

Westpac has told mortgage brokers its serviceability rate, the rate at which it tests mortgages, is now 5.35 per cent, which is down from 5.75 per cent.

The serviceability rate used to be at 7.25 per cent, but was lowered earlier this year as APRA reset the regulatory landscape.

This serviceability rate is what Westpac uses to see whether you are suitable for a loan, even though the loan offer will n ow be at around 3 per cent.

UBS analyst John Mott says any cuts from here simply decimate bank earnings because they can’t cut deposit rates any lower.

CBA, by way of example, has one quarter of all deposits on 25 basis points or less and its most popular product, Net Bank Saver, is at 15 basis points.

Deposits fund a big proportion of home loans so if the bank is earning zero or less on deposits it isn’t making much on its home loans.

The bank woes aside many, in the property game think another rate cut is just the tonic the market needs. REA’s Owen Wilson says the buyers are back. Mortgage rates at 2 per cent will further boost the market, bringing more sellers to the table.

In a recent note UBS’s Mott noted the banks are also losing control of the home loan market, with just 37 per cent of all home loans generated directly by banks’ own sales channels. This is down from 48 per cent in 2013.

While the big four banks control 79 per cent of mortgages, they are increasingly acting as the underwriters for home loans generated by the brokers.

The housing market has turned as rates fall and APRA loosened its controls on the serviceability rate.

Last year’s royal commission caused the banks to put a brake on new lending. But with fewer regulations than expected being imposed by APRA in the aftermath, combined with the RBA rate cuts, the doors are now wide open for buyers.

Low wage growth is one potential hurdle for the market, with some arguing more they’re one reason rate cuts will have little impact.

While the banks will be under pressure to pass on any rate cut, the chances of a full pass-through are limited, given where deposit rates stand at present.