Home Loan Market Wrap Up – December 2016

In Summary

Much to the delight of all mortgage holders, the RBA chose to keep official interest rates steady at 1.5% for another month following their meeting on Tuesday, December 6.

Having said this, Australia’s banks source about 40% of the funds they lend on residential property from local bank deposits. The remaining 60% of funds are sourced from the international money markets. Mostly through bond issues and the like.

As it stands, bond yields and other associated expenses are going up. This in turn increases the costs the banks must pay to raise the capital they use to fund the mortgage market. As a result, the interest rates they charge retail customers are going up.

And there will be flow-on effect to the residential property market. Especially in the east coast capitals of Melbourne, Sydney and Brisbane.

This comes on the back of changes in November to fixed rate loans where rates were increased by 0.2-0.6% depending on the the number of years fixed interest repayments.

For more information regarding the individual banks and products affected, please check the table below. We will be updating this table on a regular basis as lenders update their rates in the next few days.

The Details

Earlier in the month, Westpac and St. George announced they would increase the rate on interest-only loans and the National Australia Bank said it will boost the interest rate on investor loans by a margin of 0.15%.

The current outlook is that more broad-based interest-rate increases on variable and fixed loans are on the banks’ radar.

Over the past month there has been an increasing view from economists that we have also seen the last of the interest rate cuts from the Reserve Bank with the betting now placed on the next movement being up – although there is plenty of disagreement on when this might happen. It has been a significant change in thinking as only a few months ago the risk of deflation was prompting some experts to suggest the RBA might look at pushing rates even further down.

But even the threat of a September quarter in which Australia’s economic growth has been stagnant is probably not enough to push official rates down. The September quarter GDP numbers will be released on Wednesday, December 7 and are expected to show flat or negative growth.

Meanwhile, it seems that banks are not waiting for any lead from the RBA and are looking to increase their profitability by charging more for loans in this current environment of sluggish earnings growth.

Over the past year the banks have already pared back their exposure to higher risk loans and investment loans in response to tighter requirements from ASIC and APRA. It is expected that lenders will increase investor rates higher in response to a number of factors – primarily the fact that their cost of funding has been increasing.

According to NAB, net interest margins – the difference between what the bank pays to borrow funds to lend to  customers and what customers pay are down, particularly when it comes to home lending, and they remain under pressure.

Low interest rates pose considerable challenges to all lenders who must respond to what is happening the market as well as the prevailing political and economic landscape. In doing so, lenders have to consider a range of factors including the need to source long term stable sources of funding, the continued elevated costs of funding, regulatory requirements, and market competition.

The announcement by Westpac was made only hours after European markets were rocked by the defeat of an Italian referendum vote which was aimed at constitutional reform and the immediate decision by the country’s prime minister to step down. A few weeks earlier a number of banks increased their fixed mortgage rates in response to higher bond yields following the Trump electoral victory in the US.

Any attempt to push up the more sensitive variable interest rate for owner occupier mortgages will be far more difficult. The fierce consumer and political backlash that would follow is enough to ensure banks will be treading very carefully.

The parliamentary inquiry held in October was a clear signal to the banks that their actions were under scrutiny and they would be shamed for putting profit before customers.

But borrowers shouldn’t feel too comfortable that the banks can’t increase the main variable rate unless the RBA moves. If Australia loses its sovereign AAA rating for instance, the banks offshore funding will become more expensive. This would provide a trigger for them to raise rates.

And so some banks are starting to customers  on variable rate mortgages to look at the less politically sensitive fixed rate product. After all borrowers looking for certainty about repayments may want to consider fixing all or part of their loan.