Out of cycle interest rate increases: What’s happened & what’s going to happen.
Lenders have raised their interest rates independently of adjustments to the cash rate by the RBA. This is what is commonly referred to as ‘out of cycle’ interest rate movements.
What were the specific interest rate movements?
|Lender||Increase (in BPS)|
Why did this happen?
One view is that this has come in response to capital adequacy and lending standard adjustments being pushed by APRA. Another view is that this is a move to increase shareholder return from mortgage lending. A move that is coming from a position of market dominance that the major lenders have over the Australian mortgage lending market.
What’s going to happen to rates?
Many commentators have predicted the Reserve Bank has significant reason to consider reducing the official cash rate before the end of the year. Whether these rates will be passed on and to what extent may provide little relief for anybody with a home loan.
Although a consensus hasn’t been formed, a number of broker group chiefs have indicated that there could be further rate increases by year’s end, offsetting any reduction in cash rate. UBS banking analyst Jonathan Mott also believes rates are on their way up, regardless of RBA moves.
It is worth noting that these latest rate rises are distinctly different to the other rate rises that we saw in recent months. The previous rate rases were targeted at exclusively investment and interest-only loans as a part of APRA reforms designed to cool investment lending.
Is it a good time to fix?
Whether or not it is a good time to fix will depend heavily on one’s financial circumstances. Fixed rate loans are costly to exit and do not suit people who require the flexibility to sell during the fixed period. Similarly, they do not suit those who wish to make large sum repayments (most lenders limit additional repayments to between $5 and $25k p.a.). They do, however, provide certainty of repayment – and for people concerned about the prospect of rate rises and their budget’s ability to afford such rises, they can be an effective tool to manage such risk.
The age old question is “am I paying a price premium for this luxury?”. If so, “is the price premium justified?”. The short answer to these difficult questions is: The market is highly competitive at present for owner occupied borrowers with moderate gearing (read: under 80%LVR ). So the pickings are ripe for such borrowers (apologies to the rest of you reading this article). If you fit into that category, promotions such as 3.69%p.a. (CR n/a) have been extremely popular due to the large discount such a rate represents from the status quo. Similarly, 3 year fixed pricing is extremely competitive at present – some of our most popular products can be found here. For those seeking longer term fixed rate offerings, the highly dynamic nature of the market has led lenders to price in such volatility – as such, 5 year fixed pricing is nowhere near as sharp 2 & 3 year fixed terms. That said, compared to long run average delivery rates for mortgage loans, this is still below trend. The trend, dependent on the source one uses, suggest delivery rates for mortgages have tended towards 7 to 8%p.a. over the past 50 years in Australia.
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