Banks are taking advantage of us

CBA announced its results today – a lazy $6 billion annualized profit! It made for interesting reading. They say that the cost to fund new loans has increased 1.12% since July 2007. This doesn't mean that this new cost level applies to all home loans. Some home loans are funded using facilities established before the credit crisis. Some loans are funded using cash in transaction accounts (paying effectively zero interest). 

Now, the Bank has increased home loan rates by a total of 1.04% above RBA rate movements (per http://www.keepbankshonest.com.au/) across their whole portfolio of loans. 

It’s been a bonanza for the Bank enjoying huge market share gains – while probably increasing profit margins! It goes to show… we should never believe the banks propaganda... they are making billions!

Note to government: BRING BACK HOME LOAN COMPETITION... please.

Fixed rates only worthwhile if 7% or below

I have calculated the profit or loss for a fixed rate borrower over the past 20 years at each quarter. I then sorted this data based on the fixed rate at the time the borrower entered into the fixed rate loan and sorted from lowest to highest rate (For example, in Jan 2005 the 3 year fixed rate was 6.60%. A borrower that locked in at this rate was 0.39% better off compared to a variable rate borrower. Therefore, the graph below includes a profit bar of 0.39% at the 6.60% rate interval). 

This analysis shows that, based on history, you have a significant chance of being worse off financially if you fix your mortgage when fixed rates are above 7% (to the right of the red line). If you fix when fixed rates are below 7%, you have an even chance of being better or worse off.