What do home loans really cost?

What do banks really charge for loans?

Their advertised rates are meaningless beyond being a guide to what you shouldn’t pay, but the Reserve Bank has been making some educated guesses about the average rates being paid for outstanding loans.

The RBA’s quarterly statement on monetary policy spells out just how silly the advertised variable home loan rates are but also what sectors have done best out of the way the banks juggle their books.

Also read: Borrowers bargain hunting on home loans

The treatment of personal loans was dreadful while big business received the cream.

The RBA cut its official cash rate by 50 points last year but the regulator subsequently put the squeeze on banks to charge real estate investors more than owner-occupiers and for the Big Four to increase the amount of capital they hold.

What’s not so well known is that what it costs the banks to borrow in the first place fell 20 points in 2015 thanks to lowering deposit rates and cheaper wholesale rates.

According to the RBA’s measurement of average advertised rates, the standard variable owner-occupier rate finished the year at 5.63 per cent, 30 points cheaper than it started, but the equivalent investor loan finished at 5.9 per cent, only 3 points lower.

Well, the authorities wanted to curb investor enthusiasm.

Also read: RBA to sit tight on 2% cash rate in Feb

The advertised package variable rates are cheaper at 4.83 and 5.11 per cent respectively for owner-occupiers and investors, but the reductions over the year were less – 25 points for owner-occupied, and investor packages were 3 points higher.

Fixed rates moved much more impressively, the average advertised three-year fixed mortgage dropping 65 points for owner-occupiers to 4.43 per cent and 38 points for investors to 4.7 per cent.

But they are all advertised rates and everyone should know the banks discount them. The RBA estimates that the average outstanding mortgage rate is actually 4.86 per cent – down 29 points from the start of the year.

Small and big business did much better.

The RBA’s guess there is that the average rate on outstanding loans to small businesses fell 63 points to 5.62 per cent while the Big End of town saw rates drop 69 points to 3.92 per cent.

So the big boys received virtually all the 50 points of cash rate cuts and the 20 point fall in funding costs.

At the other extreme, the average advertised personal loan rose 10 points to 11.35 points. Ouch.

What’s interesting is how people have responded to the messages rates give them.

Also read: Inflation won't sway the RBA on rates

For a start, the cheaper fixed rates saw a higher share of mortgages go that way.

The way we save also is changing. New housing debt grew about 100 points slower than housing credit “due to ongoing rapid growth in deposits in mortgage offset accounts”, says the RBA.

Australians increasingly love their offset accounts, realising it they are the most tax-efficient way for an owner-occupier to park money, while investors also have shown a prudent streak by tending to building a capital buffer in offset accounts when using interest-only loans.

Michael Pascoe is one of Australia's most respected finance and economics commentators with over four decades in newspaper, radio, television and on-line journalism. He regularly appears on Channel 7's Sunrise and news programs and is a regular conference speaker, MC and facilitator.