Rates and Fees

Are you being ripped off with interest rates and fees?

Interest rates

In theory, interest rates are set by the Reserve Bank. When the economy is strong, they tend to go up to control inflation. When the economy is weak, they tend to go down to stimulate business and consumer spending.

In practice, rates are set more and more by the banks. Oh, they might move in the general direction of the Reserve Bank. But they go up by more, and go down by less than the Reserve Bank thinks.

Over the past few years in Australia, the gap between what the Reserve Bank charges and what banks charge has grown by 57 per cent. In New Zealand, it’s grown by 87 per cent.

On credit cards, the gap is even worse. In Australia, it’s a full 15 percentage points; in NZ, it’s 16.

As interest rates rise, and personal debt increases thanks to aggressive sales targets, the situation will only get worse. More families will spend more of their income to pad banks’ bottom line instead of reducing their debt or day-to-day living.

As you can see from the graphs below, you’re paying much more than what the Reserve Bank thinks interest rates should be. The higher the red and blue lines are, the greater the difference between what the Reserve Bank’s interest rates are and what the banks charge. And while a gap of three points might seem small, it’s an extra $750 a month on a $300,000 mortgage.

Service fees

And then there are service fees. Banks making you pay for giving them your money. Not all fees are wrong, of course. Banks often do provide genuine service. But if fees go up, shouldn’t service get better? You’d think so, but there’s no direct link between fees going up and more staff being hired to reduce the amount of time you spend waiting.

Australian bank fees are no small thing, either. A March 2009 study by Fujitsu Consulting said the average Australian pays A$1,000 a year in bank fees. That’s A$250 more than the average American, and more than double what the average Brit gets slugged.

The British might pay only A$450 year in fees because their government regulates them. Banks there have to show a relationship between what you pay and what it costs the bank to provide the service. Not so in Australia and NZ. Maybe that should change.