Looking to keep the Australian economy steady and moving in an upward trend, the Reserve Bank has left the official cash rate on hold for yet another month. However, lender rate rises have begun, with lenders making a move to independently raise rates to negate their rising costs.
Here’s the deal: Given this move by lenders, economists predict that the RBA won’t make changes to the official cash rate anytime soon. Plus, these financial commentators suggest that if lenders continue to make independent rises, then the RBA may be forced to drop rates to stimulate the economy and consumer spending.
So, what’s this independent move mean for Australian homeowners?
Australian Home Loans & Lender Rate Rises
With economists warning that out-of-cycle rate rises are going to be a common occurrence, mortgage holders must prepare for financial changes in the future. Those who have variable rates and have stretched their borrowing capacity to its maximum potential should consider their options. Otherwise, they may be facing higher mortgage repayments.
For instance, smaller Australian lenders were the first to make independent rate rises back in June 2018. These lenders shifted their variable rates on principal and interest owner-occupier loans up by 10 basis points. At the same time, interest only owner-occupier loans and interest-only investor loans also rose up by 15 basis points. Then in the closing months of September, one of the big four banks announced that it too would independently raise its variable rates by .14 basis points.
What’s the bottom line? Well, for an Australian family with a $300,000 home loan, this lender move will add an extra $35 to their interest repayment monthly. Now, while this doesn’t sound like a lot, over a year this is $420. Plus, many Australians have far larger mortgages than $300,000.
But, it gets worse: This move by banks is expected to put Australian households under greater financial stress, especially when the debt-to-income ratio nationally sits at 200%. Australian borrowers will also find it harder to obtain a loan with it estimated that four in 10 home loan applications, including those refinancing, are rejected due to stricter lending conditions.
Now, you might be wondering: Why are lender rate rises occurring out-of-cycle?
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The Cause of Australian Lender Rate Rises
According to economists, Australian lenders are finding it difficult to maintain their current interest rates due to rising bank bill swap rates. Now for those who don’t know, bank bill swap rates are the short-term interest rate that benchmarks Australian dollar securities pricing. The RBA suggests that around 20% of bank funding is short-term derived and that the banks can no longer absorb these rising short-term costs as they have down in the past.
But here’s the kicker: Residential loans typically account for over 50% of a lenders total loan portfolio. Thus, the sheer size of the portfolio means that the rising costs are affecting their profit margins.
How Australian Home Owners Can Combat Lender Rate Rises
Rather than preparing for battle, many economists suggest that borrowers seek to combat rate rise now by looking at their options. Why? Well, interest rates are still at record lows, and borrowers who consider fixing can even lock-in rates for under 5%.
This is crazy: Mortgage comparison sites indicate that the average 3-year fixed loan is just above 4%, while the average variable rate is closer to 5%. Many lenders have also adjusted their fixed rates, with reductions to make themselves more competitive in the market.
But, most borrowers with variable rates, also have a ‘set and forget’ mindset when it comes to their home loan. Unfortunately, this can lead to higher mortgage stress later, especially as home values continue to adjust nationally.
How Is Australian Housing Performing?
The Australian housing market, according to recent CoreLogic RP Data, is currently estimated to be worth $7.6 trillion, with the number of dwellings sitting around 10 million. The value of outstanding home loan debt hovers at $1.77 trillion, with household wealth estimated to be at 52.2%.
Nationally, dwelling values have fallen 2.2%, since peaking in September of 2017. Weaker housing conditions are attributed to tighter lending restrictions, especially in investment terms, and reduced market competition.
|Dwelling Values August 31, 2018|
|City or Suburb||Month||Qtr.||Year||Total Return||Median Values|
Source: CoreLogic RPData
Want to know the best part? As a borrower, you can consider your options, rather than waiting for rate hikes. So, if you have a home loan, then now is the time to start looking at its affordability. You can do this by using a mortgage calculator to work out your repayments if your rate rises by 0.5%, by 1%, and even by 2%. If making repayments at these higher rates are going to be a struggle, then seek out an alternative that will make your home loan more affordable.
Are you looking to beat a rate rise by securing a more competitive home loan? If you said YES, then it’s time to discuss your options with an eChoice mortgage broker. Our brokers have access to 100’s of products across a panel of multiple lenders, so we can help you find a competitive mortgage.