The common perception is that banks are quick to pass on borrowing rate hikes but slow to pass on rate increases to savings accounts.
It's a subject of concern to many retirees who want the certainty of a regular income to fund their retirement, and to those who might be considering guaranteeing a mortgage for family members.
To be fair to the banks, the lag between borrowing and saving rates adjustments after Reserve Bank of Australia (RBA) decisions is affected by the fact that the banks are still servicing low-interest fixed loans. Any rate rise will affect the cost of capital in the bank's own borrowings.
As the official rates rise, banks also face the prospect of borrowers defaulting, and we should expect that they deal fairly with customers put in that position.
When the current fixed mortgage rates disappear, however, we should expect that banks will pass on higher interest rates to savers.
So, how do depositors find the best and most suitable interest rates? It's a tricky business because banks apply finicky and hard-to-understand conditions on some products.
As the Australian Financial Review reported, "Some higher saver rates go to new rather than existing savers; apply to only some of the bank's accounts; only offer the biggest increases for short-term promotions; and are making increases off rock bottom amounts well below the inflation rate."
The good news for savers is that banks are likely to increase savings rates under mounting pressure from competitors to attract more deposits to help fund their home loans.
One feature of the current banking landscape to be treated with caution is "honeymoon" transfer rates on credit cards - where one bank tries to lure customers from its competitors by taking on their card balance with a zero-interest rate for a fixed period. The "sugar rush" of no interest payments could lead to bad outcomes for some customers down the track when the full rate - often as high as 20 per cent - kicks in.
Responding to political pressure from everyday savings account holders, federal Treasurer Jim Chalmers has asked the competition regulator to investigate banks' behaviour in passing on interest rates to savers.
The Australian Competition and Consumer Commission (ACCC) will probe the deposit market to ensure banks are "treating their customers fairly when it comes to savings accounts".
The ACCC will report to the Treasurer by December and is expected to release an issues paper in the coming months.
Commentators say the ACCC findings may put the banks "on notice" but will have little effect on lenders - although any resulting bad publicity could bring pressure on banks over their savings account rates.
Jarden analyst and chief economist Carlos Cacho told the Sydney Morning Herald he believed banks' margins would continue expanding in the early part of this year.
"While I don't think the ACCC inquiry will end up finding anything, it certainly ups the political pressure on banks over their deposit pricing," he said. It's a sentiment endorsed by Canstar group executive Steve Mickenbecker who told the SMH the more limited increases in savings rates probably did not amount to anti-competitive behaviour by banks, but the ACCC probe could create negative publicity for the sector.
High interest rates and high property prices have seen a trend in first-home buyers seeking to increase their buying power by asking their parents to go guarantor on a loan.
Seniors need to ensure they are fully informed before agreeing to be a guarantor because of the large financial risk involved. Chief Executive of the Banking Code Compliance Committee (BCCC), Prue Monument, advises:
- Be fully informed and clear about what you are signing up for.
- Don't feel pressured into going guarantor.
- Be on the lookout for financial exploitation, or what's known as "elder financial abuse".
The BCCC monitors banks' compliance with the Banking Code of Practice, which includes obligations to ensure customers make fully informed decisions before agreeing to be a guarantor. As subscribers to the code, banks promise to meet these obligations.
The Code's section on loan guarantees says, among other things, that banks must tell potential guarantors:
- There are financial risks involved in guaranteeing a loan.
- You should seek independent legal and financial advice.
- You can refuse to sign the guarantee.
- You can ask the bank for information about a loan you guarantee.
- It's possible the guarantee may cover future credit and variations of the loan, within the limits set.
A BCCC inquiry into the loan guarantee practices of banks in 2021 found failures by banks to consistently provide full disclosure of key information to guarantors.
The committee is now conducting a follow-up inquiry to check that banks have improved their practices since that report.
In particular, it is asking people to complete a short survey to hear about experiences in considering or providing a loan guarantee.
The follow-up inquiry will identify good practices for other banks to follow as well as highlighting areas that might need more focus and attention.
The 2021 report said about $500 billion of credit was being supported by guarantees.
Seniors considering this may be better served by taking an equity release on their own home to finance a bigger deposit for their children, or to help pay lenders' insurance, rather than guarantee the entire mortgage.
