What the new bank levy could cost you

What the new bank levy could cost you

One surprise to come out of Australia’s 2017 Federal Budget was the introduction of a new ‘budget repair’ levy on Australia’s big banks.

While Australia’s leading bankers are having some frank discussions with Treasury officials, financial commentators are speculating as to whether this levy would likely end up being paid out of the big banks’ profit margins, or if the costs would somehow be passed on to their shareholders or customers.

We’ve made some calculations of how much this new bank levy could potentially end up costing a typical Australian mortgage holder if the banks were to raise interest rates to cover the levy’s cost, so you can work out how much you may want to keep aside in your budget just in case:

How much will the bank levy be?

According to the federal government:

“The Government will introduce a levy on major banks with liabilities greater than $100 billion, raising $6.2 billion over four years. The levy will be used to support budget repair.”

It is understood that the five banks in Australia that this levy would affect are Commonwealth Bank, Westpac, ANZ, NAB and Macquarie Bank, and that the levy would take effect from 1 July 2017.

How much could the banks charge to cover the levy costs?

While the bank levy is intended to only affect banks at an institutional level, it remains possible that the big banks could make up the levy’s extra cost to them by increasing charges to their customers.

One of the simplest ways that the banks could make up the cost of the levy would be to increase interest rates across their mortgage books. Exactly how high an an increase would be required is not certain, with industry experts and financial commentators coming up with a variety of estimates: 

  • According to former CBA chief executive and head of the government’s financial system enquiry, David Murray, if the banks were to pass on the levy’s costs, it could result in increase to interest rates of up to 20 basis points.
  • Analysts from Morgan Stanley also estimated a potential 20 basis point increase in standard variable interest rates. 
  • UBS Group analyst, Jonathan Mott, estimated a potential rate rise of 12 to 14 basis points across the board. An alternative option was to increase owner occupied mortgage rates by 10 basis points and and investment property loans by 25 basis points.
  • Analysts from Goldman Sachs are understood to have estimated a potential rate rise of 14 basis points to offset the cost of the bank levy.
  • An interview on Sky news With Prime Minister Malcolm Turnbull also referenced an estimated increase of 14 to 15 basis points.

How much could this cost an average Aussie homeowner?

At present, it remains to be seen whether the big banks will attempt to pass on the cost of the government’s bank levy directly to their customers through interest rate rises. With the federal government and regulatory bodies keeping a close eye on the banks, it’s also possible they may attempt to absorb the levy’s costs from elsewhere.

But it’s always worth being prepared and understanding your options just in case the worst should happen.

Consider the following hypothetical example:

  • An owner-occupied home loan for $353,700 – the Australian average according to the ABS
  • An interest rate of 4.6% – the current market average according to RateCity data
  • A remaining loan term of 15 years

If, in a worst-case scenario, the bank levy led to this hypothetical home loan’s interest rate rising by 20 basis points to 4.8%, you would see the following increases:

Interest rate Monthly repayment Total cost over 15 years
4.6% $2724 $490,300
4.8% $2760 $496,858
INCREASE $36 per month $6558 over 15 years

Please remember that these figures are examples only, and do not account for fees, charges, or additional costs. Please read the assumptions and disclaimers for the RateCity Home Loan Calculator.

How can you estimate your own potential increases?

To find out how much worse off your mortgage could end up as a result of the bank levy, check your bank statement or your internet banking account to find the amount currently owing on your mortgage, as well as your current interest rate and remaining loan term.

Enter these figures into a mortgage repayment calculator to get an estimate of the cost for your home loan’s remaining term. 

Next, run the same numbers through the calculator again, but increase your interest rate figure by 0.2% to simulate the potential increase that could be made as a result of the government bank levy. See the difference in the results!

If you doubt you’d be able to afford further increases to your home loan’s interest rate, it may be worth looking at your available options for refinancing your home loan.

Refinancing home loans:

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Learn more about home loans

Interest Rate

Your current home loan interest rate. To accurately calculate how much you could save, an accurate interest figure is required. If you are not certain, check your bank statement or log into your mortgage account.

What happens to my home loan when interest rates rise?

If you are on a variable rate home loan, every so often your rate will be subject to increases and decreases. Rate changes are determined by your lender, not the Reserve Bank of Australia, however often when the RBA changes the cash rate, a number of banks will follow suit, at least to some extent. You can use RateCity cash rate to check how the latest interest rate change affected your mortgage interest rate.

When your rate rises, you will be required to pay your bank more each month in mortgage repayments. Similarly, if your interest rate is cut, then your monthly repayments will decrease. Your lender will notify you of what your new repayments will be, although you can do the calculations yourself, and compare other home loan rates using our mortgage calculator.

There is no way of conclusively predicting when interest rates will go up or down on home loans so if you prefer a more stable approach consider opting for a fixed rate loan.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

What is a variable home loan?

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

What is the difference between fixed, variable and split rates?

Fixed rate

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

Variable rate

A variable rate home loan is one where the interest rate can and will change over the course of your loan. The rate is determined by your lender, not the Reserve Bank of Australia, so while the cash rate might go down, your bank may decide not to follow suit, although they do broadly follow market conditions. One of the upsides of variable rates is that they are typically more flexible than their fixed rate counterparts which means that a lot of these products will let you make extra repayments and offer features such as offset accounts.

Split rates home loans

A split loan lets you fix a portion of your loan, and leave the remainder on a variable rate so you get a bet each way on fixed and variable rates. A split loan is a good option for someone who wants the peace of mind that regular repayments can provide but still wants to retain some of the additional features variable loans typically provide such as an offset account. Of course, with most things in life, split loans are still a trade-off. If the variable rate goes down, for example, the lower interest rates will only apply to the section that you didn’t fix.

What is a comparison rate?

The comparison rate is a more inclusive way of comparing home loans that factors in not only on the interest rate but also the majority of upfront and ongoing charges that add to the total cost of a home loan.

The rate is calculated using an industry-wide formula based on a $150,000 loan over a 25-year period and includes things like revert rates after an introductory or fixed rate period, application fees and monthly account keeping fees.

In Australia, all lenders are required by law to publish the comparison rate alongside their advertised rate so people can compare products easily.

What is an interest-only loan? How do I work out interest-only loan repayments?

An ‘interest-only’ loan is a loan where the borrower is only required to pay back the interest on the loan. Typically, banks will only let lenders do this for a fixed period of time – often five years – however some lenders will be happy to extend this.

Interest-only loans are popular with investors who aren’t keen on putting a lot of capital into their investment property. It is also a handy feature for people who need to reduce their mortgage repayments for a short period of time while they are travelling overseas, or taking time off to look after a new family member, for example.

While moving on to interest-only will make your monthly repayments cheaper, ultimately, you will end up paying your bank thousands of dollars extra in interest to make up for the time where you weren’t paying off the principal.

What is the best interest rate for a mortgage?

The fastest way to find out what the lowest interest rates on the market are is to use a comparison website.

While a low interest rate is highly preferable, it is not the only factor that will determine whether a particular loan is right for you.

Loans with low interest rates can often include hidden catches, such as high fees or a period of low rates which jumps up after the introductory period has ended.

To work out the best value for money, have a look at a loan’s comparison rate and read the fine print to get across all the fees and charges that you could be theoretically charged over the life of the loan.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What is a fixed home loan?

A fixed rate home loan is a loan where the interest rate is set for a certain amount of time, usually between one and 15 years. The advantage of a fixed rate is that you know exactly how much your repayments will be for the duration of the fixed term. There are some disadvantages to fixing that you need to be aware of. Some products won’t let you make extra repayments, or offer tools such as an offset account to help you reduce your interest, while others will charge a significant break fee if you decide to terminate the loan before the fixed period finishes.

How long should I have my mortgage for?

The standard length of a mortgage is between 25-30 years however they can be as long as 40 years and as few as one. There is a benefit to having a shorter mortgage as the faster you pay off the amount you owe, the less you’ll pay your bank in interest.

Of course, shorter mortgages will require higher monthly payments so plug the numbers into a mortgage calculator to find out how many years you can potentially shave off your budget.

For example monthly repayments on a $500,000 over 25 years with an interest rate of 5% are $2923. On the same loan with the same interest rate over 30 years repayments would be $2684 a month. At first blush, the 30 year mortgage sounds great with significantly lower monthly repayments but remember, stretching your loan out by an extra five years will see you hand over $89,396 in interest repayments to your bank.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.

Can I change jobs while I am applying for a home loan?

Whether you’re a new borrower or you’re refinancing your home loan, many lenders require you to be in a permanent job with the same employer for at least 6 months before applying for a home loan. Different lenders have different requirements. 

If your work situation changes for any reason while you’re applying for a mortgage, this could reduce your chances of successfully completing the process. Contacting the lender as soon as you know your employment situation is changing may allow you to work something out. 

Can I get a home loan if I am on an employment contract?

Some lenders will allow you to apply for a mortgage if you are a contractor or freelancer. However, many lenders prefer you to be in a permanent, ongoing role, because a more stable income means you’re more likely to keep up with your repayments.

If you’re a contractor, freelancer, or are otherwise self-employed, it may still be possible to apply for a low-doc home loan, as these mortgages require less specific proof of income.