It was recently revealed that the Commonwealth Bank had delivered a year-end, after-tax profit of $10.2 billion might have come as a shock to those struggling to pay their ever-increasing mortgages.
Since the Reserve Bank of Australia entered its rates-hiking cycle in May 2022, monthly repayments have jumped around $1400 on an average-sized loan. The average loan size has also increased. It now sits at $580,000 for owner-occupiers, up from around $483,000 in early 2020 before prices skyrocketed during the pandemic.
Our increasing mortgage repayments have coincided with a sharp surge in the cost of essentials, including groceries and energy. The contrast between the huge CBA profit, derived in large part from home loans, and the cost-of-living pressures faced by households could not be starker.
The CBA results are, as much as anything, a reminder of how we flock to the big banks for our home loans. Despite their often less-competitive rates, the four major banks (CBA, Westpac, ANZ, NAB) dominate the home loan market and we cannot seem to shake our dependence.
The figures deserve some attention.
The total value of Australia's home loan market is a bit over $2 trillion (yes, trillion). Of that, CBA holds an estimated 25 per cent of all home loans, with loans amounting to $565 billion.
Westpac holds second place, with around 22 per cent of the market.
When you add ANZ and NAB to the mix, the total held by the big four banks in Australia is around a staggering 80 per cent of the home loan market (over $1.75 trillion).
Simply put, home loans are an enormous driver for bank profits in Australia. For CBA, around 70 per cent of loans on the books are home loans - business loans are a distant second. It is similar for Westpac. ANZ and NAB lending is also substantially driven by home loans.
Home loans are huge business, which is why banks use a variety of methods to entice you.
From deals on credit cards to savings accounts, these are in large part geared to ensure that, when it comes time to seek a home loan, your first thought is the bank with which you already have an account. For many people, convenience is compelling.
The reality is, what banks are selling is fundamentally the same - a loan to you, from them.
Over the life of a loan, interest is more important than convenience or incentives. You would not buy a boat just to get a free bottle of champagne.
Smaller banks can offer better borrowing deals, but these are often ignored.
For example, on a $500,000/30-year mortgage, at 6 per cent interest, you would pay $2,998 per month. At 7 per cent interest, that is $3,326 per month. Over the life of the loan, that 1 per cent difference amounts to an extra $118,353 in interest payments.
For those coming off a fixed-rate loan onto a variable loan, it is a reminder to shop around. There is a strong chance you will not be rolled over to the best deal. Call the bank and ask what can be done - there is no harm in asking - and they certainly will not be calling you.
Major banks have recently indicated the need to protect their interest margins, as concerns start to mount about the risk of mortgage defaults. Some have stopped cashback bonuses for new customers, while recent analysis shows that rates offered for new homeowners have been increasing faster than RBA rate rises.
It is a clear sign that major banks intend to continue the squeeze on lenders to protect their margins and profits.
Despite this, the big banks are betting on inertia. They know that, if you get a loan with them, chances are you will stick around for thirty-odd years paying interest. However, just because you start a loan with one bank, it does not mean you have to stay if another bank can offer better terms on your circumstances. But rather than simply going with a big bank, I encourage you to weigh up the costs, services and convenience, and make an informed call.
By going against the grain, you could save yourself many thousands of dollars.
- Kim Northwood is the author of "Work Less, Make More: The Millennial's Guide to Financial Freedom", available online and in bookstores: www.kimnorthwood.com. He was formerly an adviser to Australia's trade and investment minister. Instagram @kim_northwood_finance_guy