David Hayward | The Money Institute | 25 November 2010

Some of you may be benefiting from the recent bank interest rate rises because clients are scrambling for a better deal from their banks. But there could be a much more insidious impact for brokers as the banks price their money outside of RBA moves on interest rates.

Clearly you can see that the impact of the banks increasing their rates beyond RBA levels has created a huge consumer controversy and media storm. Rightly so, in some quarters as customers are struggling to meet financial obligations.

However, the resultant political response to reign in the banks could unwittingly pose serious risks to the brokers livelihood.  This could come in a variety of different ways.

Firstly, if the banks are forced to remove exit fees, as some have already done, this may result in the imposing larger costs at the application stage, making it less desirable for customers to ‘switch’ loans if the refinancing cost becomes prohibitive.

Secondly, banks may move to reduce brokers upfront commissions in an effort to ‘offset’ the costs of acquisition of new clients. Most banks would indicate that they don’t make any money on a standard variable home loan in the first few years.

Finally and probably most importantly, if the banks bow to political pressure and don’t try to recover ‘margin’ ground by increasing interest rates beyond the RBA levels, they may consider finding other ways to recover ‘margin’ and potentially look at reducing broker commission rates and trails.

Ultimately anything is possible but history tells us that banks would like to stabilise margins at least at 2.40% above cost of funds but historically have moved beyond that to over 4%.

Hopefully some sanity will prevail in all and what seems to be lost on all of this customer fury and media attention is it was the RBA that moved interest rates up first based on endeavouring to curtail inflationary triggers, of which one of the biggest contributors is Government Spending!