It’s been over 2 years now since the Reserve Bank did its job. Well, that’s perhaps a little harsh, given the complete conundrum the monetary policymaker continues to find itself in, every month, without fail. Like Groundhog Day.
If it’s not one thing, it’s another. For whatever reason, something, somewhere in the world and in our own backyard, is causing a misalignment of fiscal fortunes.
On the one hand, we’ve experienced runaway property markets and profit-seeking investors having a veritable picnic off of their equity. And on the other, a whole generation of Australians are being systematically displaced from the housing sector due to affordability issues.
Add to that stagnant wage growth, a hefty jump in the cost of living, oh and now a turn of fortunes for some of the overheated property markets that really needed to come off the boil anyway…not to mention the ensuing panic as headlines proclaim an imminent housing market crash…and well, I know I wouldn’t want to be sitting around that table every first Tuesday of the month.
Enter…the banks
The last five or so years have been a real tug of war between banks, regulators and the RBA. Attempting to maintain a semblance of calm control in a sea of global housing and finance market chaos and uncertainty is no mean feat. Ever tried spinning plates and juggling the entire contents of your cutlery drawer all at once?
The latest move in the ongoing low interest rate saga has been from the banks. No surprise, given their primary interest lies in keeping profits ticking over. Particularly during times of consumer unease.
As lenders start to feel the bite of rising cost of funding and take stock of potential profit margins and projections, Westpac has been the first to announce it would raise all variable mortgage rates by 14 basis points (0.14%) from September 19.
Chief executive of Westpac Brian Hartzer told the ABC, “That (cost of funding) started going up in February, we were hoping that it would go back down. It hasn’t, and after six months at a sustained level, we’ve reluctantly concluded that it’s going to stay at that more elevated rate, and therefore we came to the conclusion that this needed to be reflected in the price of our loans.”
The 14-basis point increase will see mortgage holders with a $300,000 loan pay an additional $35 per month. But Hartzer is confident their customers can find that little bit extra, given the bank’s assessment criteria allows for a 2.5 per cent rate rise buffer on all new loans written.
Only the beginning?
Of course this move by Westpac begs the question for borrowers everywhere…will the other Big Four and/or smaller lenders follows suit?
Interestingly, analysts suggest this could be an isolated incident, as Westpac has a bigger Interest-Only book, meaning they’ve enjoyed a bigger upwards repricing. Whereas now, with people making the switch back to P&I, that trend’s reversing.
As such, borrowers with lenders other than Westpac and some of the smaller players may not need to wonder if and when they’ll feel the sting of an interest rate rise any time soon.
“If it were just driven by the very short term, I would’ve thought ‘yep, of course they’ll follow’,” said CLSA banking analyst Brian Johnson when speaking of the rise.
“But, given the degree of scrutiny and the risk that the federal bank levy could be increased – because in Australia that levy is 6 basis points, but I can point to a number of countries where that figure is above 20 basis points – so the risk is we could see that levy increase quite significantly.”
One trend is obvious throughout the entire financial services sector right now, and that’s the banks searching for less risky borrowers.
Westpac’s new standard variable rates for instance, will range from 5.38 per cent for owner-occupiers with P&I loans, and up to 6.44 per cent for property investors with IO loans.
Similarly, ANZ has advised mortgage brokers that it will decrease its basic P&I interest rate for new owner-occupier customers by 0.34 per cent, when securing a loan valued at 80 per cent or less of the property’s value. Whereas rates are notably higher for IO loans and LVR’s above 80%.
If you haven’t already taken a look, check out our article on switching from IO loans to P&I loans for smart money savings. This is the direction lenders are funnelling new and existing business into now. It’s all about risk mitigation and future planning. And profit margins of course!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).