Banks Increase Rates, RBA Keeps Cash Rate at 1.5 Percent
At it’s October meeting, the Reserve Bank of Australia (RBA) kept the cash rate at a record low of 1.5 percent, extending its record period of policy inaction beyond two years. Even though the RBA is not expected to raise official interest rates in the near future, both smaller and larger retail banks have imposed out-of-cycle mortgage-rate hikes, whilst others are offering lower promotional rates to entice new customers.
Australian home loan interest rates could be pushed higher by climbing US interest rates and the increasing cost of funding for the retail banks, due in part by the Federal Reserve and European Central Bank’s policy direction to tighten their monetary policies.
Non-Major Lenders Increase Market Share
Non-major lenders are steadily increasing their share of the mortgage market. In figures release in September, the non-major lenders took 41% of the mortgage market share for the June quarter – their largest ever recorded.
The reason for the increase is a result of tighter lending criteria by the major banks, and uncertainty in the market around the big four after the findings from the banking royal commission. Borrowers have been encouraged to approach smaller lenders and their often competitive offers, resulting in a general growth in borrower trust of the non-major lenders.
Fixed or Variable Rate Home Loans?
Recently, borrowers have been urged to switch to fixed-rate home loans, as interest rates remain, for now, at near record lows.
In the wake of rising lending costs, and the bulk of the banks’ funding costs on variable rate loans, some banks have reduced their fixed mortgage rates to stay competitive. Several banks offer fixed-rate mortgages that are cheaper than variable loans though it varies significantly by lender and their target markets.
The main benefit of fixed rate mortgages is that borrowers are protected from increasing their repayments if interest rates rise, and budgeting is easier knowing exactly what your repayments will be each month. On the flipside, if interest rates decrease, you are stuck paying more than the variable rate. There may also be limits on extra repayments, and a “break fee” if you change your loan or pay it off before the fixed-rate period ends.
Revisit Your Loans Annually
The decision to stay fixed or go variable depends on your circumstances, though it is most important to revisit your mortgage products and interest rate annually to ensure it meet your current and future needs. Many clients I meet with are not sure of the current rate, so I encourage everyone to take 5 minutes, review your loan account on line and if unsure if your loan product and rate are competitive contact me to discuss further.
It could be costing you thousands.