With the RBA setting the official cash rate at all-time lows, it’s a good time to work out how this impacts the interest rate on your home loan and whether you are getting a good deal or not.
When the interest rate on your home loan fluctuates, it can feel as though you don’t have control of your debt. Despite being frustrating, interest rate changes are a part of every loan’s lifespan and warrant your consideration.
The interest rates that banks charge on their home loans are influenced by the Reserve Bank of Australia’s (RBA) cash rate.
The cash rate is reviewed by the RBA on a monthly basis in order to safeguard Australia’s economic stability. The cash rate is the rate charged on loans made between the RBA and your lender. This, in turn, has a very strong impact on the interest rates your lender charges you.
“The RBA supports the banks with liquidity facility,” explains Advantedge General Manager Brett Halliwell. “The RBA is a bank to the banks. The cash rate is effectively the rate at which the RBA will lend to the banks, and what the banks effectively use as a reference rate for other things.”
When the cash rate is changed by the RBA, lenders decide whether or not to mirror the new rate in the interest they charge their mortgagees.
This is entirely up to the lender in question and depends on the market and how the lender is performing at the time of the cash rate change.
“If you look at the mortgage market, specifically by itself, it is very competitive,” Halliwell says. “It is about the lender trying to get the right outcome on the deposit side of the balance sheet within the context of a very, very competitive marketplace, but recognising that a reference rate has changed and, therefore, looking at where they stand.”
Some lenders choose to shift their interest rate changes higher than the RBA’s cash rate change and, in these instances, other lenders may be offering lower interest rates than the one you currently have.
Keeping track of how your lender manages cash rate changes and where that leaves you as the person paying the interest can be time consuming, and is made more difficult by fees, charges and the flexibility offered by different loan products, which all need to be weighed alongside the interest rate.
A simple way to regain control of your interest rate is to lock it in for a period, if you believe rates are not likely to fall further. Fixed rates offer less flexibility, but more certainty.
To discuss what changes to interest rates that lenders have made recently and how that may affect you contact us on 07 3911 1190 or use our contact form.
Westpac cuts investor loan discounts
The SMH article reports that Westpac has joined ANZ, CBA and NAB in reducing the incentives for property investors. The regulators and APRA in particular have made it clear over the last 6 months that they consider growth in investment loans over 10%pa as a risk to the financial system.
Westpac – whose investor lending grew 11.5 per cent in the year ended March – is the most exposed to property investor lending of the major banks and is strong in NSW via its St George Bank subsidiary.The changes will apply to Westpac and all of the brands it owns, including St George, Bank of Melbourne and BankSA.
It is evident now that APRA is taking the measures they see necessary to reduce the growth in property investment loans to below 10%pa.
APRA grew more restless when Reserve Bank of Australia data released on the last day of April showed the banks expanded loans for property investments in the year ended March 31 by 10.4 per cent – the highest rate since 2008 and above APRA’s limit.
Even with these changes by the major banks it is still possible to get investment loans at rates below 5%. Whether these measures taken will reduce growth to a level acceptable by APRA or if additional measure will be required by APRA time will tell.
APRA has more tools to tackle house prices
Continuing the theme this week this is another article looking at the changes that are occuring in the investor lending space. This article looks at what other measures that the Regulator APRA can bring to play to address the concern they have with the growth of investor lending in Australia.
APRA has recently outlined it has further measures it could implement, including increasing capital requirements, applying limits to certain types of lending, as well as additional oversight.
“Higher capital requirements were a recommendation from last year’s financial system review and any official announcement on them is still forthcoming,” Mr Bloxham said.
“The flagging of the possibility that prudential settings might be further escalated likely reflects the fact that there are trends in parts of the financial system that could be becoming more worrisome.”
Given the talk from both APRA and ASIC, and the action which has already been taken by a number of banks, there is going to be continued differentation in pricing or maximum LVR’s between onwer occupier and investment loans.
Given the growth in property prices which have been seen in Sydney and Melbourne, it is easy to see where APRA and ASIC’s concerns are.
Sydney house prices have shot up 14.9 per cent, year-on-year and 40 per cent over the last three years, while Melbourne have risen 8.5 per cent in the last year and 22 per cent over the last three, according to HSBC and RP Data.
We will have to wait and see if the current measures put in place by APRA and the mainstream banks will have the desired effect moderating growth of property prices to more sustainable levels or if APRA will have to utilise some of the other tools in its arsenal to get the desired results.