Here’s the real reason why banks are lifting home loan interest rates
Wednesday 22 March 2017
Much has been made of the fact that big banks - and more than a few smaller lenders - have been raising interest rates on home loans in recent weeks. But now Mozo’s Data Manager Peter Marshall has weighed in on the reason behind these rate hikes.
With the US Federal Reserve increasing rates, bond yields, which are a major driver of offshore funding, will also be pushed up. Since some of the funding for Australian lenders comes from overseas, that means the banks’ lending costs will rise, regardless of the RBA’s official cash rate decision.
So the cost of securing this funding is a factor in the interest rates banks set, and has been the rationale most often given by banks when they hike rates for home loan borrowers.
But given that existing deposits from Aussie savers account for around 60% of bank funding, the cost of securing offshore funding can’t be the only reason rates are on the way up, Marshall explained.
“The way the banks tell it, funding pressures are the overriding factor in the recent rate increases, but that excuse is getting a bit tired,” he said.
“The more pressing reason is that an RBA rate rise is being treated as more or less a given at this point. Banks are pretty certain rates are on the way up, so they’re factoring future increases into their rates now.”
The RBA kept rates steady at a record low of 1.50% in its March meeting, and has been tipped to keep rates flat until at least the end of 2017, if not until next year. So why are the banks making these pre-emptive rate hikes so early?
“Demand for property and home loans is high, so the banks know that interest rates creeping upwards isn’t likely to scare borrowers off,” Marshall said.
Banks may be particularly eager to plump up fixed term home loan rates which they won’t be able to adjust a year or so down the track, if and when the RBA does increase rates.
Another reason banks are eager to lift rates at the moment is that APRA may soon tighten restrictions across all lending, amidst talk of “heightened risk” in the housing market, and fears of a bubble forming. This will limit banks’ future lending numbers, so lenders are keen to pad their profit margins while they still can.
To add insult to injury for borrowers, these profit chasing rate hikes are occurring despite the fact that Commonwealth Bank raked in a record $4.9 billion profit for the half year ending on 31 December 2016. Its 2016 full year profits totalled $9.2 billion, and the other big banks were not so far behind, with Westpac recording a net profit of $7.45 billion, while NAB netted $6.42 billion and ANZ made $5.7 billion.
So things are looking gloomy for borrowers with banks raising interest rates every day, and an official RBA rate increase looking like a forgone conclusion. But if your bottom line is suffering from home loan rate hikes, switching to a better deal could save you a stack of cash. Head over to Mozo’s home loan comparison table to find out if there’s a better offer on the market for you.