When the major banks raised their borrowing rates more than the RBA raised the overnight cash rate, it was to cover the increased costs of their own borrowing. Or so they’ve said since October, when the RBA first started tightening monetary policy.

But a report published by the Reserve Bank in March reveals that the banks have already covered their increased funding costs. Instead, the higher margins have flowed straight to the banks’ bottom lines.

The report shows that the banks’ lending costs have increased by roughly 1.3% to 1.4% since the start of the global financial crisis in July of 2007. However, the interest rates charged by banks on outstanding balances to their customers has risen by 1.6% to 1.65%. (All figures quoted are relative to the RBA overnight cash rate.)

The difference between what the banks are charged and what the banks charge their clients is called the margin or the spread. And it’s pure profit.

“Most of the increase in lending rates over the cash rate has been due to higher funding costs,” the RBA report said. “For the major banks, however, there has also been some widening in their lending margins.”

The banks’ higher interest rates were not spread evenly across all financial products. Unsecured personal loans, such as credit cards and other personal debt, saw rates rise the most with a widening spread of as much as 3.4% relative to the RBA cash rate. Variable rates for small businesses widened by 2.0%.

On the other hand, the spread on variable rate mortgages widened by only 1.1% relative to the cash rate.

Some borrowers, at least, appear to have grasped this concept. According to figures provided by broker AFG, the percentage of loans written for refinancing mortgages, which often includes a rollover of credit card balances and other personal debt, increased to 36% currently from 29% in August, prior to the first of the RBA rate hikes.

Source: http://www.businessday.com.au