We’ve had a lot of clients ask us recently, “why are interest rates being increased by banks, when the Reserve Bank of Australia (RBA) hasn’t had a rate increase?” To explain we need to give you a quick run down on a few things.
How does the Reserve bank affect interest rates?
The Australian Federal Government owns the RBA, and the RBA issues Australian currency. It also seeks to provide stability (or some control) over Australia’s financial system.
The Reserve Bank Board makes decisions about the interest rate on cash (called the ‘cash rate’), that banks borrow from other banks. An increase or decrease in the cash rate affects many factors in Australia’s economy. This includes the interest rate that you pay for your mortgage, which, for example, would go up if the cash rate went up.
How does the Reserve bank ‘cash rate’ affect loan interest rates?
You are probably very familiar with your interest rates (if you have had a variable loan) going up and down when the RBA announces that it is increasing or decreasing the ‘cash rate’. Historically, the banks would mimic any changes to the cash rate by changing the interest rate charged to you whenever there were any changes made by the RBA.
But why are the banks changing their interest rates now?
This is a good question, and the answer lies overseas.
The major banks, in particular, get a certain amount of their funds (to lend to you) from overseas. This is a complex situation to explain, however there are more funds obtained from overseas when there are less funds deposited into banks from within Australia.
The sources of funding for banks include a combination of the banks own equity, the deposited funds and then their borrowed funds. The equity situation for a lender is quite stable, however less deposits put into banks leads to more overseas funds borrowed by the banks.
Why are costs going up for overseas funds? The overseas funding closely matched the US and other global markets. You can read more about it in this article by Macro Business.
So, at the moment, it is costing more for banks to borrow from their overseas sources and they are choosing to pass these costs on to you by increasing their variable interest rates. Some of the recent banks to announce increases include CBA, ANZ, Westpac and most recently, NAB. It may be a good time to seek out some of the smaller lenders that are less likely to be borrowing overseas funds and thus more reliant on the Reserve Bank interest rate decisions.
Many banks are choosing to increase rates on investor loans initially, and also on Interest Only loans. This may roll out to more and more home owners if the situation overseas continues the way it is going.
Possibility RBA rate staying on hold for the next 12 months.
There is also some talk of a potential longer-term hold on any change to the RBA interest rate. See this article by the Financial Review.
Now could be a good time for you to switch your variable loan to a fixed rate loan if you are with one of the big four banks. Or, you may want to consider making the switch away from them, to a more competitive lender. We can help. Contact us to find out how we can help.
How to reduce your Monthly Mortgage Repayments
If you’re feeling the pressure on your purse strings at the moment and would like to reduce your monthly repayments it is probably a good time to check out our Free Mortgage Savings Checklist.