Rate rises: how the banks could ruin Christmas

Rate rises: how the banks could ruin Christmas

Since late November, around 34 lenders have increased their interest rates on approximately 500 fixed loan products. While the rate rises have started off small, ranging from 0.05 per cent to around 0.6 per cent, a trend for increasing rates has been set in motion.

These rate increases are known as out of cycle increases as they are not in reaction to an official Reserve Bank of Australia cash rate movement. Historical data shows us that the RBA will typically raise the official cash rate 4 to 5 months after fixed rates start to move up.

So why are the bank’s moving rates? And what does this mean for borrowers going forward?

Data insights director at RateCity.com.au, Peter Arnold, answers all your questions about the recent fixed rate rises.

Why are rates on the rise?

Rates are on the rise because of expectations that in 2017, global interest rates will be higher.

This has been spurred on by some big news in the US with the new president and his intentions of a lot of fiscal spending which will flow on to inflation. When we get too much inflation in the economy, central banks will raise interest rates.

While that’s happening in the US, there’s always flow on effects to Australia. Some of the Australian banks get part of their funding for Aussie mortgages through the US markets and if rates are higher over there it makes it more expensive for them, which means it will be more expensive for Aussie borrowers.

Why do banks pass on rate rises faster than rate cuts?

Fixed rates will generally rise quite quickly when we see things like this happening in the market. A fixed rate is basically banks betting where rates will be next year.

They know that every day they delay doing it, they’re committing to loans at a lower rate. So if they start to think that rates are going to go up, or the market is telling them that they will, then they’re essentially losing money every day they don’t rise.

What should borrowers do now? Is it time to fix?

Traditionally it’s been very hard for people to pick the bottom of fixed rates.

We’ve seen rates decreasing for over 5 years now and suddenly there’s a turn in the market and we’re seeing more than a third of the market increasing their rates. That does leave two thirds of the market that haven’t raised their rates yet so it’s not necessarily too late to get a good deal.

There’s no guarantee that this will continue throughout next year but if you look at what’s happening in the market, and how many lenders are moving and by how much they are moving, you’ve got to think that maybe rates will be higher next year.

Now is not going to be the worst time to fix if you look at where rates have been for a while and the fact that we are starting to see them increase. But in saying that, this could be a blip on the radar in the scheme of things and we could continue to see more rate cuts next year.

What implications could rate rises have for the housing market?

The housing market, particularly in Sydney and Melbourne, is quite inflated.

They say the two things that can burst a property bubble very easily are rises to interest rates or rises to unemployment. Basically, the two things that would make a lot of people sell their houses at the same time because they can’t afford their mortgages. I don’t think one or two rate rises will be enough to pop that bubble but it’s certainly something that may be enough to move the sentiment of the market.

A lot of what we’ve seen in the past few years is a positive sentiment about rising house prices and people rushing into that. So if rates do go up a bit and people do perceive the property market as more expensive, and less of a good option, then that can have flow on effects to price growth.  

What do these rate rises mean for savers?

The other side of the coin to home loan rates are savings rates, and for fixed rates, term deposits are the equivalent. Generally, as fixed rates go up, term deposits are likely to go up as well. However, the reason they are increasing fixed rates on home loans is that part of the cost of funding fixed loans is going up.

Term deposits are another part of their funding and if they were to increase rates on term deposits as well that would mean that more rate rises are required on fixed loans. So, I don’t think we will see many immediate term deposit increase but as rates go up that will drive term deposit rates up eventually as well. 

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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.

Mortgage Calculator, Loan Purpose

This is what you will use the loan for – i.e. investment. 

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.

Does Real Time Ratings' work for people who already have a home loan?

Yes. If you already have a mortgage you can use Real Time RatingsTM to compare your loan against the rest of the market. And if your rate changes, you can come back and check whether your loan is still competitive. If it isn’t, you’ll get the ammunition you need to negotiate a rate cut with your lender, or the resources to help you switch to a better lender.

How is the flexibility score calculated?

Points are awarded for different features. More important features get more points. The points are then added up and indexed into a score from 0 to 5.

Do other comparison sites offer the same service?

Real Time RatingsTM is the only online system that ranks the home loan market based on your personal borrowing preferences. Until now, home loans have been rated based on outdated data. Our system is unique because it reacts to changes as soon as we update our database.

What is a valuation and valuation fee?

A valuation is an assessment of what your home is worth, calculated by a professional valuer. A valuation report is typically required whenever a property is bought, sold or refinanced. The valuation fee is paid to cover the cost of preparing a valuation report.

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Will you pay off the amount you borrowed + interest or just the interest for a period?

What is the flexibility score?

Today’s home loans often try to lure borrowers with a range of flexible features, including offset accounts, redraw facilities, repayment frequency options, repayment holidays, split loan options and portability. Real Time Ratings™ weights each of these features based on popularity and gives loans a ‘flexibility score’ based on how much they cater to borrowers’ needs over time. The aim is to give a higher score to loans which give borrowers more features and options.

What is a building in course of erection loan?

Also known as a construction home loan, a building in course of erection (BICOE) loan loan allows you to draw down funds as a building project advances in order to pay the builders. This option is available on selected variable rate loans.

Mortgage Calculator, Interest Rate

The percentage of the loan amount you will be charged by your lender to borrow. 

How common are low-deposit home loans?

Low-deposit home loans aren’t as common as they once were, because they’re regarded as relatively risky and the banking regulator (APRA) is trying to reduce risk from the mortgage market.

However, if you do your research, you’ll find there is still a fairly wide selection of banks, credit unions and non-bank lenders that offers low-deposit home loans.

How often is your data updated?

We work closely with lenders to get updates as quick as possible, with updates made the same day wherever possible.

Why is it important to get the most up-to-date information?

The mortgage market changes constantly. Every week, new products get launched and existing products get tweaked. Yet many ratings and awards systems rank products annually or biannually.

We update our product data as soon as possible when lenders make changes, so if a bank hikes its interest rates or changes its product, the system will quickly re-evaluate it.

Nobody wants to read a weather forecast that is six months old, and the same is true for home loan comparisons.