Why has my bank sent me a letter advising a rate rise when the RBA has not lifted the cash rate? Why has my rate increased on the same day that my mates went down?
Over recent weeks many of you would have received correspondence from your bank advising of a rate increase to your home loan. This is despite the fact that the last time the RBA moved the cash rate was a reduction in August 2016.
So why are the banks increasing your interest rates?
Regulation. The banks have made changes to manage demand in line with market movements and to ensure they comply with new regulations brought in by APRA to manage the risks of rising house prices, namely the requirement to maintain investor lending within a 10% growth limit and interest-only lending within a 30% growth limit. Changes to regulation will create an opportunity for you as consumers as the banks fight to manage the spread of their loan books on a month to month basis.
Recent examples of this is a bank offering unadvertised fixed 3 & 5 year rates of 3.99% P&I for Investment or Owner Occupied. The key here is Principal & Interest. This would have ensured a flood of Principal & Interest Loans to their book which assists in reducing the banks spread of interest only lending while creating an opportunity for you as the consumer to lock in a fantastic rate.
Increased borrowing costs are another reason banks are charging a higher rate. The race to the bottom has finished. Banks have continually cut margin and absorbed additional funding costs to win market share over the last 12 months. With most of my clients being small business owners, you would know that this is not a sustainable business model.
These regulation changes have given the banks an opportunity to claw back some margin; a hard pill to swallow when the banks announce their multi-million dollar profits each year.
So how is this going to affect you & what can you do about it?
According to analysts, in the medium-term interest rates for investors and loans with interest only payments are likely to go up to keep banks within the new thresholds.
Servicing benchmarks may be further tightened. This will affect individuals borrowing capacity as regulators try to ensure you can afford your loan repayments as rates rise.
We’re going to see lenders come in and out of the market for certain loan types, however in the current marketplace if one lender pulls back another lender picks up the business. With these changes, if you were to take out the same loan today with your current lender, they may not be the best fit for your needs or even accept your application.
It’s not all doom and gloom. Interest rates are still at historical lows and we have seen solid growth in house prices over recent years.
Is your current loan appropriate for your circumstances? Are you paying too much interest? Do you need to consolidate some credit card debt?
It is imperative to have your current loan and structure reviewed to ensure you are optimising your personal finances.
If you have any questions please contact Eddie Harrison on (07) 5599 5747