Don’t be afraid to switch

Savings rates

Since the start of the cash rate hikes in May 2022, the Big Four have been passing each rise in full to variable mortgage customers. But they haven’t always been passing these higher rates on to all of their savings accounts, leaving a lot of Australians feeling short-changed.

To put things in perspective, while the cash rate and mortgage rates have increased by 4% since May 2022, regular savings account rates have been lucky to rise by even half that amount. The ongoing rates on the major banks’ online saver accounts have only risen by between 1.05 and 2.15 percentage points, causing some savers to miss out on up to 2.95 percentage points.

While everyday savers are missing out, all four major banks have passed more than the RBA’s four percentage point rise to their bonus saver customers, provided they meet the monthly terms and conditions. Although, notably, some are still marginally below market leading ongoing savings rates. 

For example, at the time of writing, Westpac is the only one of the big four banks to offer a savings account with a rate of more than 5% - and this 5.20% savings rate is limited to 18 to 29 year olds who fulfil other terms and conditions, and is still well below the leading savings rate of 5.65% from ME Bank. There are at least nine banks offering savings rates of more than 5.50% at the time of writing. 

The stark difference in returns between bonus and regular savings accounts is being condemned, with the Big Four Banks being accused of picking and choosing their savings account increases, instead of passing on the benefits to everyone, equally.

Out of cycle mortgage rate hikes

Australia’s big banks have been passing on the RBA’s cash rate hikes on to their customers, putting mortgage holders at greater risk of mortgage stress as their repayments have risen. But they haven’t stopped there. 

Even with the RBA putting the cash rate on pause in April, July, August and September 2023, the big banks have continued to raise home loan interest rates out of cycle. At the end of August 2023, customers taking out a variable rate loan from NAB could have been paying an interest rate up to 50 points higher than at the start of the year, even without the RBA’s hikes.

RateCity research in September 2023 has also found that the big four banks collectively have now increased at least one advertised new customer variable rate on 22 occasions since 1 March 2023, in addition to the standard RBA hikes. Additionally, over the month of August 2023, more lenders had increased variable rates (24) than those that had cut (13) for owner occupiers paying principal and interest.

Other differentiators

As well as raising rates out of cycle from the RBA, some of the major lenders have been pulling back on offering extra incentives to encourage borrowers to switch to them. 

For example, cashback deals are special home loan offers where the lender pays the borrower a sum of cash for successfully settling a home loan with them. They’re often targeted toward customers refinancing their mortgages from other lenders, allowing them to offset some of their switching costs, such as upfront and ongoing fees, solicitors’ fees, and stamp duty.

However, in the last few months the Big Four Banks have been slowly taking them off the table. In May 2023, Commonwealth Bank announced it would discontinue its $2000 cashback offer from 1 June. Just a few days later, NAB announced it would discontinue its $2000 cashback after 30 June 2023. This was followed by Westpac axing its $3500 cashback from 30 June. And in August 2023, ANZ cut its $4000 cashback offer in half to $2000. 

These out of cycle rate hikes and withdrawal of other switching incentives come on the heels of record levels of refinancing activity. A record $21 billion worth of home loan refinancing in March 2023. In June 2023, a total $266.96 billion worth of loans have been refinanced since May 2022, when the current rate hiking cycle began.

These high refinancing volumes are likely making offering discounted interest rates and cashbacks an expensive exercise for the banks, hence they are ditching them. While this may be helping to protect the banks’ bottom lines, it certainly isn’t doing their customers any favours; in fact, it’s making them feel rather neglected.

The reality is that banks aren’t obliged to pass on rate increases to savers, and they can cut cashbacks out of their home loan offers if they please. Like other businesses, banks can choose which levers to pull to best look after their customers, while also watching their own bottom line.

As customers, this means we can’t just automatically assume we’ve been getting each and every savings rate hike in full, nor can we assume that the home loan from our current bank is the best offer on the table.

While we can wait and hope for the government or the Australian Competition & Consumer Commission (ACCC) to act, it’s really up to us. One practical measure you could consider is to move your business to an institution that offers better savings rates and home loan refinancing deals to get more out of your hard-earned money.

What to consider when switching to a smaller lender

While the big banks are reluctant to offer fruitful savings accounts and cashback offers, there are plenty of smaller lenders that are willing and eager to earn your business.

The good news is it’s just as safe to switch to smaller alternative lenders as the big banks, as these lenders are also required to hold credit licences and follow regulations that make them legitimate in Australia - they just simply operate on a smaller scale. So, your money or home should still be safe and secure in their hands.

For example, to accept deposits in Australia, a financial institution must be registered at an Authorised Deposit-taking Institution (ADI) with the Australian Prudential Regulation Authority (APRA). Newly established institutions must apply to be a Restricted ADI for a two-year period before they can apply for a full ADI licence.

Banking with an ADI means that money you deposit is guaranteed by the Australian government under the Financial Claims Scheme (FCS) – if the bank was to go out of business, you’d get your money back (up to $250,000 per person, per institution).

And as for your mortgage, if your lender was to go out of business, your home loan would most likely be transferred to a new bank that chooses to absorb the bankrupt mortgage lender. You’ll keep making the same mortgage repayments as before, only to a new lender.

As with any financial decision, just make sure you carefully consider your options before switching any accounts to ensure you’re making a move that’s right for you. Consider your needs and goals and conduct the necessary research and calculations to work out what’s best for you. With smaller lenders, there may be different conditions you have to fulfil, so make sure you know what you’re in for before you make the switch.

For savings accounts, you may want to consider:

• interest rates;
• fees and charges;
• how quickly and easily you can access your money, and;
• how much you need to deposit at the start (and ongoing) to successfully grow your funds.

When it comes to cashback offers, if you find one that’s suitable be sure to read the terms and conditions carefully to make sure you’re eligible. Also, to look beyond the dollar signs. While cashbacks can be tempting, it’s important to carefully consider the overall value of each home loan - comparing the interest rates, fees, and features - to find the option that best suits your personal needs.

It can be easy to fall into the mindset that switching banks is a big hassle, and to just stick with the one you’re with out of comfort. But switching isn’t so hard, and the benefits can far outweigh the effort it takes. Ultimately, getting comfortable with another bank that’s offering a better rate may help you reap more rewards and better achieve your financial goals.

Remember, your money is your money, and you get to choose what you do with it and where it goes, to make the most of it. If that means switching lenders (after careful consideration), then don’t be afraid to do so.