How not to defend an big increase in mortgage rates: talk about banana smoothies

By Bernard Hickey Westpac has sent customers in Australia a video using the analogy of banana smoothie prices going up after a storm to justify a big increase in its variable mortgage rate. This has sparked outrage across the ditch, as much for the ham-fisted and patronising delivery as the mortgage rate increase itself. Check out the video below to understand the bone-headedness of the idea. Essentially Westpac is saying that just like banana smoothie makers passing on higher banana prices, Westpac has increased its price for mortgages because of the storm in financial markets last year. The reaction to this video sent via email to customers was brutal. Prime Kevin Rudd said Westpac needed to have a long hard look at itself and customers should consider banking elsewhere. Marketing experts and consumer rights advocates were similarly grumpy. Watch the video in the playlist below or here.

''This long-winded parable of Westpac being like a banana seller in a storm on a tropical island somewhat beggars belief,'' said Stephen Pearson, head of the ad agency Lowe Worldwide. ''The style and tone is quite child-like, and for any educated person [it is] likely to be seen as condescending.'' Richard Foster, head of the Financial and Consumer Rights Council, also criticised it, coming as it did off the back of comments yesterday by the Westpac chief banana, Gail Kelly, that customers would not be hurt by the rise. ''When a mortgage holder is experiencing stress and housing affordability, I don't think they are going to be overly impressed that Westpac says it is helping them by putting up rates.''

So why has this struck such a chord in Australia and what does it mean for homeowners in New Zealand. The real pain is in the size of Westpac's increase in its variable mortgage rate last week that preceded the explanatory email. Westpac lifted its 'Rocket Repay' variable mortgage rate by 45 basis points to 6.76% just one hour after the Reserve Bank of Australia increased its cash rate by 25 basis points to 3.75%. The problem for Westpac is that the other big three banks lifted their variable rates by less. CBA, which owns ASB here, raised its variable rate by 37 basis points to 6.61%, while ANZ raised its rate by 35 basis points to 6.66% and NAB increased its rate by 25 basis points to 6.49%. Here are all the Australian mortgage rates on our sister site interestratenews.com.au. Australians are grumpy that the banks have passed on the OCR with interest (except for NAB) and they have reason to be grumpy. The banks are arguing their funding costs are up, but this has less validity for this mortgage lending funded at very short terms. Here's an excellent article from Interestratenews.com.au arguing that Westpac's margins in Australia have actually fallen this year. Westpac is actually trying to rebuild its profits after a big hit from bad loans in the last year. There's a genuine argument to be had about the balance to be struck between profits and prices. Westpac is essentially saying in its video that it needs to protect its profits and therefore its future by putting up prices. It should stop trying to argue this and simply accept that it's in a competitive market and will need to find savings elsewhere. The New Zealand impact Meanwhile, more New Zealanders are opting for variable mortgage rates, breaking a fixed mortgage habit of a life time. That means when our Reserve Bank starts putting up rates late next year we may find the same debates put forward by the banks. We'll see. I've got a feeling Westpac won't be talking about banana smoothies again.