One surprise to come out of Australia’s 2017 Federal Budget was the introduction of a new ‘budget repair’ levy on Australia’s big banks.
While Australia’s leading bankers are having some frank discussions with Treasury officials, financial commentators are speculating as to whether this levy would likely end up being paid out of the big banks’ profit margins, or if the costs would somehow be passed on to their shareholders or customers.
We’ve made some calculations of how much this new bank levy could potentially end up costing a typical Australian mortgage holder if the banks were to raise interest rates to cover the levy’s cost, so you can work out how much you may want to keep aside in your budget just in case:
HOW MUCH WILL THE BANK LEVY BE?
According to the federal government:
“The Government will introduce a levy on major banks with liabilities greater than $100 billion, raising $6.2 billion over four years. The levy will be used to support budget repair.”
It is understood that the five banks in Australia that this levy would affect are Commonwealth Bank, Westpac, ANZ, NAB and Macquarie Bank, and that the levy would take effect from 1 July 2017.
HOW MUCH COULD THE BANKS CHARGE TO COVER THE LEVY COSTS?
While the bank levy is intended to only affect banks at an institutional level, it remains possible that the big banks could make up the levy’s extra cost to them by increasing charges to their customers.
One of the simplest ways that the banks could make up the cost of the levy would be to increase interest rates across their mortgage books. Exactly how high an an increase would be required is not certain, with industry experts and financial commentators coming up with a variety of estimates:
- According to former CBA chief executive and head of the government’s financial system enquiry, David Murray, if the banks were to pass on the levy’s costs, it could result in increase to interest rates of up to 20 basis points.
- Analysts from Morgan Stanley also estimated a potential 20 basis point increase in standard variable interest rates.
- UBS Group analyst, Jonathan Mott, estimated a potential rate rise of 12 to 14 basis points across the board. An alternative option was to increase owner occupied mortgage rates by 10 basis points and and investment property loans by 25 basis points.
- Analysts from Goldman Sachs are understood to have estimated a potential rate rise of 14 basis points to offset the cost of the bank levy.
- An interview on Sky news With Prime Minister Malcolm Turnbull also referenced an estimated increase of 14 to 15 basis points.
HOW MUCH COULD THIS COST AN AVERAGE AUSSIE HOMEOWNER?
At present, it remains to be seen whether the big banks will attempt to pass on the cost of the government’s bank levy directly to their customers through interest rate rises. With the federal government and regulatory bodies keeping a close eye on the banks, it’s also possible they may attempt to absorb the levy’s costs from elsewhere.
But it’s always worth being prepared and understanding your options just in case the worst should happen.
Consider the following hypothetical example:
- An owner-occupied home loan for $353,700 – the Australian average according to the ABS
- An interest rate of 4.6% – the current market average according to RateCity data
- A remaining loan term of 15 years
If, in a worst-case scenario, the bank levy led to this hypothetical home loan’s interest rate rising by 20 basis points to 4.8%, you would see the following increases:
|Interest rate||Monthly repayment||Total cost over 15 years|
|INCREASE||$36 per month||$6558 over 15 years|
Please remember that these figures are examples only, and do not account for fees, charges, or additional costs. Please read the assumptions and disclaimers for the RateCity Home Loan Calculator.
HOW CAN YOU ESTIMATE YOUR OWN POTENTIAL INCREASES?
To find out how much worse off your mortgage could end up as a result of the bank levy, check your bank statement or your internet banking account to find the amount currently owing on your mortgage, as well as your current interest rate and remaining loan term.
Enter these figures into a mortgage repayment calculator to get an estimate of the cost for your home loan’s remaining term.
Next, run the same numbers through the calculator again, but increase your interest rate figure by 0.2% to simulate the potential increase that could be made as a result of the government bank levy. See the difference in the results!
If you doubt you’d be able to afford further increases to your home loan’s interest rate, it may be worth looking at your available options for refinancing your home loan.