Friend or Foe: is your bank getting between you and the RBA?

Another three rate cuts worth about $140 a month on the average mortgage are on the way, if the market is right.

It has been so far. In fact, it saw rate cuts coming well before the Reserve Bank did.

Not only that, it's even more convinced (with an 80 per cent probability) of a Melbourne Cup day cut than it was on the eve of the latest one (75 per cent).

By next April the Reserve Bank's cash rate would have fallen from 3.25 per cent to 2.5 per cent. Not that your mortgage will fall as much, let alone get anywhere near there.

In just a year, the Reserve has cut rates 1.5 per cent, but mortgages have fallen as little as 0.93 per cent and as much as 1.21 per cent, depending on the lender, according to Canstar.

The least likely lender to pass on rate cuts has been MyRate, but only because its variable rate was so far below the banks' to begin with it wasn't funny. Even as we speak, MyRate's variable is 5.92 per cent, almost two rate cuts below what the banks will discount (but you'll have to ask).

While the Commonwealth has been just shy of methodical in passing on rate cuts - bet you didn't see that coming - it can afford to because it's not the cheapest.

That would be loans.com.au's 5.46 per cent, according to Canstar.

Even so, after taking fees into account it's really 5.74 per cent, just pipping UBank's 5.75 per cent (and apparently higher 5.82 per cent).

But is it better to fix?

Definitely, for some of the mortgage.

You should only fix when the market thinks rates will fall because you're getting tomorrow's cheaper rate today.

When it thinks rates will rise, you'd be paying the increase in advance. Not a good move.

The cheapest three-year rate is UBank's 5.38 per cent, so there'd have to be four more rate cuts - or probably five considering the banks hold back a bit - to beat that.

What's more, they'd have to last three years. Neither is likely, though you never know.

Hang on, it gets better. Mates Rates Mortgage Brokers rebate some of the commission lenders pay so it can provide a three year bank loan for 5.38 per cent in the first year, falling to 5.18 per cent for the rest of the term.

Whatever. Paying off the mortgage earlier and faster is always better, no matter what rates do.

"In the early stages of a loan the majority of your repayments are being consumed by interest, whereas extra repayments go straight off the principal," a Smartline adviser, Sam Ghoreyshi, says.

Pay an extra $200 a fortnight from the first repayment - an offset account will do - and you'll save $167,000 in interest over 30 years on a $400,000 mortgage with a 6 per cent interest rate.

After tax that would take about three years to earn on an average income.

Waiting five years before adding the extra $200 a fortnight lowers the savings to $111,000, but, hey, who's complaining?

Which brings me to bank bashing, since I knew you'd ask.

Frankly, the banks are doing more Australians a favour than they've let down by not passing on the full cut. And that includes your super.

They're helping twentysomethings and over 55s most, not that I'm saying that was ever the intention. I think I can safely say it wasn't.

They've kept something up their sleeve for themselves but spared savers from worse.

Clinging to their profit margins helps their share price and so the average super fund, since it's likely to have more bank shares, which account for 40 per cent of the market, than anything else.

Speaking of profits, there's scepticism over whether the costs of wholesale funding have indeed increased.

As a matter of fact, they've been falling.

Trouble is, lower they might be, but they're still higher than what the banks paid three or more years ago.

As that old money is re-financed, the banks' average costs of funding must rise, even though at the margin rates are falling.

By the same token, if the wholesale markets stay where they are for a year or so, the average rate will drop and the banks should pass that on. That'll be interesting to see.

Incidentally, while the banks have been criticised for not passing on the entire cut to borrowers, nothing has been said about one real improvement.

They haven't been dragging their feet as much as they used to between announcement and action.

"Last year it took about three weeks. This time there's a lag of a week," an analyst at Canstar, Mitchell Watson, says.

They've been even faster cutting their online deposit rates, which have dropped the full 0.25 per cent.

Yet they've been very slow in cutting term-deposit rates. Or have they?

These began falling about a month ago as the market anticipated more rate cuts from the Reserve Bank.

"The banks have been pricing in a fall for a month. A lot have come down by 10 to 12 basis points," another Canstar analyst, Adam Beu, says. The Greater Building Society lowered its term deposit rates by just 0.10 per cent last week. So savers are winning the tug-of-war with borrowers.

One reason is that the banks have been told by the regulator to rely more on fixed deposits than borrowing offshore for funds to lend. Ratings agencies are going one better, having already penalised Australian banks for their heavy reliance on offshore borrowings which, by the way, is why our foreign debt is up there with the worst of Europe.

Since the banks will always have to borrow some portion of their funds offshore, they'll do anything to keep their credit rating.

That's why term-deposit rates are four times more generous, relative to the official cash rate, than those long-forgotten days before the GFC.

How long will this last?

National Australia Bank's chief financial officer, Mark Joiner, last week said funding costs would be elevated until the middle of 2014.

At the other end of the national demographic, those saving up for their first home are the biggest winners of all.

True, they get less on what they've saved for a deposit, but then the mortgage will be cheaper, too.

Besides, open a first-home saver account with a bank, credit union or building society, and the deposit rate becomes practically irrelevant.

The tax on the interest is only 15 per cent irrespective of your income and, better still, you get 17 per cent of what you deposited gratis from the government up to $1020 (which would be on a $6000 deposit) each financial year. As you can imagine, there are lots of terms and conditions, but so long as you're committed to buying a place eventually, it's hard to beat.

New deal wins big savings on home loan

EVEN he couldn't believe the deal his brother got him when Daniel Dennis refinanced his mortgage to take advantage of lower interest rates. He is suddenly about $45 a week better off, not counting the $700 free credit welcome he was given by his new lender, with a mortgage rate starting with a five.

Daniel, a real estate agent on Sydney's north shore, and his wife, Diana, had a 0.7 per cent discount on their ANZ mortgage, which made it 6.10 per cent.

But they wanted to lock in lower fixed-term rates on part of their mortgage, and ANZ's offerings weren't worth it.

Brother Ben Dennis, an adviser at mortgage broker Smartline, tried to twist the bank's arm.

''I was told that as they were existing customers the bank couldn't do any better,'' Ben says.

Turns out they were lucky.

Smartline last week signed them up with St George at a variable rate of 5.91 per cent for a $200,000 mortgage - an 0.95 per cent discount to its advertised rate - and $300,000 fixed for three years at 5.59 per cent. The bank also credited the couple's account with $700 because they had refinanced a loan of more than $250,000.

Better still, ''a week before settlement, St George dropped its fixed rates again to 5.49 per cent for three years and I simply made a call to the bank and cancelled the rate lock to ensure they settled at a new rate,'' Ben says.

But wait, there's more. St George also dropped its variable rate by 0.17 per cent last week.

''I'm very happy, even though my brother is more on the ball than I thought,'' Daniel says, possibly tongue-in-cheek.

''I expected something in the high fives, and I didn't even have to do anything. He said, 'Leave it to me.'''

Also, mortgage brokers don't charge borrowers - they are paid commission by the successful lender.

''I thought with what's happening to interest rates, and we want more kids down the track, I wanted to fix some of the mortgage,'' Daniel says.

''I feel comfortable with locking in for three years even if rates drop a little bit more. There's probably more to come but it will be to variable rates. Low rates will come to an end eventually and then there'll be a sudden spike.''

Not even two more rate cuts would faze him, especially as he will receive half of them from the variable side of his loan.

''I've already saved a bucketload of money,'' he says.

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