Fed up with the latest round of rate hoarding by our lenders and card issuers, 3?? years ago I developed an Interest Integrity Index to capture the bottom-line impact of interest aberrations on Australians. It's ringing the loudest alarm bell yet.
Two of Australia's Big Four banks (NAB and Westpac) have just put up interest rates out-of-cycle on owner occupier borrowers. The reasons given? Funding pressures ... Donald Trump ... almost "the vibe".
Really, it's because they can. APRA has demanded lenders stem investor loans to stop rampaging property prices and the banks have been only too happy to oblige with higher rates for this group. There's apparently no royal commission in sight. Oh and millions of Aussies will bitch but not bother to switch.
The thing is, since the credit crack up, maverick rate moves have almost become "they-broke-the-rules-first" sport for the big banks. We commissioned mozo.com.au to chronicle the independent hikes for owner occupiers (and investors): three apiece - so far. And official cuts have been held back some seven times.
With loan sizes blowing out at the same time, the extra cost of borrowing from the Big Four has reached well over $100,000. The average mortgage holder who stays put will pay a $115,925, what I call, lax tax. This is the difference between the advertised interest over 25 years on the average big bank home loan (at 5.28 per cent) and the cheapest home loan (currently Reduce Home Loans' 3.39 per cent).
That figure has leapt 54 per cent since I first ran the Interest Integrity Index in September 2013, when the interest overcharging was only $75,116.
The rate differential between the biggest and best over that period has moved from 1.42 percentage points to a whopping 1.89 per cent. And this applies to an average home loan that is now 21 per cent higher at $363,600, according to the Australian Bureau of Statistics.
Sure, rates are now lower due to the four official rate cuts in those 3?? years, but by only 0.63 of a percentage point for the Big Four; the most competitive rate is down more than 1 percentage point. And the big banks' advertised rate sat 3.41 points above the cash rate back then, while today it's pushed up to 3.78 points.
The profiteering is not limited to mortgages, though that's where we're focused due to recent interest outrages. When you also consider personal loans and credit cards, big bank customers pay $122,912 over the odds across a lifetime.
This figure is a huge 56 per cent higher in under four years, when banks fleeced $78,948 from the average Aussie.
Personal loans cost an extra 8.14 percentage points where this was previously only 3.54 points, and the inflated rate applies to an average loan search on mozo.com.au of $19,700, which has not changed. Credit cards set you back an excruciating 11.89 points too much, formerly just 7.75 points, applied to an average debt now a few hundred dollars less at $4277, according to moneysmart.gov.au's debt clock.
That means you are potentially throwing away $4737 and $2250 on your personal loan and credit card respectively (at a $100 monthly credit card repayment). The cheapest products are G&C Mutual Banks' 5.99 per cent personal loan for customers with a top credit rating and Police Credit Union's 6.99 per cent Visa card (note there are no interest-free days).
The bottom line? By sticking with the Big Four banks for their debt products, Aussies are giving up the equivalent of a luxury car, retirement several years earlier or their house deposit itself (10 per cent in Sydney; 15 per cent in Melbourne).
And the true cost of lifetime loyalty may be higher even than $122,912 as my Interest Integrity Index assumes just one 25-year mortgage, one five-year personal loan and one average credit card debt that is repaid and never rebuilt.
Yet the Big Four's share of the mortgage market - the big earner for them and waster for you - has remained fairly static at 83 per cent, says APRA. With banks appearing to have taken monetary policy into their own hands, more borrowers need to take action.
First, I hope you know you should never actually pay their advertised home loan rate - that average 5.28 per cent - even though they'll never tell you. The Reserve Bank says the average discounted rate in the market is 4.5 per cent but mystery shopping suggests even larger cuts are available. Phone and tell them you could be paying as little as 3.39 per cent and see what they do.
Second, if your bank goes nowhere near that rate (and they can't), leave. Remember you're no longer a home-loan hostage: there are no (or low) exit fees.
You could give yourself seven rate cuts virtually instantly. And pocket almost $400 a month.
Nicole Pedersen-McKinnon is a commentator and educator who presents Smart Money Start, fun financial literacy, in high schools around Australia. themoneymentorway.com
