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. 

Did you find this helpful? Why not share this article?

Advertisement

RateCity

The money talks which you don't need to avoid any more

Subscribe to our newsletter so we can send you awesome offers and discounts

Advertisement

Learn more about home loans

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 the difference between a fixed rate and variable rate?

A variable rate can fluctuate over the life of a loan as determined by your lender. While the rate is broadly reflective of market conditions, including the Reserve Bank’s cash rate, it is by no means the sole determining factor in your bank’s decision-making process.

A fixed rate is one which is set for a period of time, regardless of market fluctuations. Fixed rates can be as short as one year or as long as 15 years however after this time it will revert to a variable rate, unless you negotiate with your bank to enter into another fixed term agreement

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 however fixed rates do offer customers a level of security by knowing exactly how much they need to set aside each month.

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.

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.

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.

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 a split home loan?

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 guarantor?

A guarantor is someone who provides a legally binding promise that they will pay off a mortgage if the principal borrower fails to do so.

Often, guarantors are parents in a solid financial position, while the principal borrower is a child in a weaker financial position who is struggling to enter the property market.

Lenders usually regard borrowers as less risky when they have a guarantor – and therefore may charge lower interest rates or even approve mortgages they would have otherwise rejected.

However, if the borrower falls behind on their repayments, the lender might chase the guarantor for payment. In some circumstances, the lender might even seize and sell the guarantor’s property to recoup their money.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

What is breach of contract?

A failure to follow all or part of a contract or breaking the conditions of a contract without any legal excuse. A breach of contract can be material, minor, actual or anticipatory, depending on the severity of the breaches and their material impact.

What happens when you default on your mortgage?

A mortgage default occurs when you are 90 days or more behind on your mortgage repayments. Late repayments will often incur a late fee on top of the amount owed which will continue to gather interest along with the remaining principal amount.

If you do default on a mortgage repayment you should try and catch up in next month’s payment. If this isn’t possible, and missing payments is going to become a regular issue, you need to contact your lender as soon as possible to organise an alternative payment schedule and discuss further options.

You may also want to talk to a financial counsellor. 

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.

Mortgage Calculator, Repayment Type

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

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.