Interest Rates on the Move (Up)
/Interest Rate Volatility Continues
A range of lenders have raised interest rates for both variable rate and fixed rate loans during the past few weeks. We have included a summary of these changes in the table below. And there will almost almost certainly be further changes as we move into the new year. Only this week Suncorp announced that it will be increasing its home loan rates for existing and new borrowers from January 23.
Analysis
Over the past month there is a view emerging among economists that we have seen the last of the rate cuts induced by actions of the RBA. The next movement is now seen as likely to be up but with no consensus other than it will be sometime in 2017. Elizabeth Knight in the Canberra Times reported in early December that banks are looking to increase their profitability and we are now seeing evidence of this occurring across the board, albeit in an uneven fashion as each lender positions itself to capture more or less of particular types of customer.
The other factor at play is the move by the US Federal Reserve to increase rates. Michael Janda of the ABC explains how this will likely affect Australian investors and borrowers. US financial conditions have a "significant bearing on currencies, bonds, shares and other financial assets, as well as economies, around the planet".
"If Australian banks are offering higher interest rates to depositors, they have two choices: cut profits or raise lending interest rates. From your experience of how Australia's banks operate, which option do you think they will take?"
| Lender | Owner Occupier | Investor | Int. Only | 3 Year Fixed | Date |
|---|---|---|---|---|---|
| AMP | - | + 15 | - | + 13 | 9 Jan |
| ANZ | - | + 8 | - | 16 Dec | |
| CBA | - | + 7 | Mar 2017 | + 20 | 16 Dec |
| Choicelend | + 10 | + 10 | + 10 | - | 24 Jan |
| ING DIRECT | + 15 | + 15 | + 15 | + 30 | 12 Dec |
| ME Bank | + 10 | + 10 | + 10 | + 15 | 4 Jan |
| NAB | - | +15 | - | - | 12 Dec |
| Suncorp | +15 | + 15 | - | - | 23 Jan/13 Dec |
| Westpac | - | - | + 8 | +24 | 16 Dec |
Table 1: Schedule of Recent Lender Interest Rate Announcements (created with the HTML Table Generator)
The OECD also believes that next move in official interest rates in Australia will be up. Peter Martin in the Sydney Morning Herald reports that in its review of the Australian economy that rate rises will be "appropriate given likely monetary-policy developments elsewhere, the cyclical development of the domestic economy and the need to unwind tensions from the low-interest environment, notably in the housing market".
What Can Borrowers Do?
It is always disappointing when lenders offer attractive discounts to entice borrowers through their doors and then grab back margin once they feel the first twinges of funding pain. But for now, borrowers should sit tight and wait for the present round of volatility to subside. It is likely that most lenders will take the opportunity now presented by the market to notch up their lending margins.
This might be a time to consider locking in part of your loan at a fixed interest rate. I generally recommend this course of action only for borrowers who want repayment certainty, rather than as a strategy for saving money. Note that there are potential pitfalls when fixing your rate: with certainty comes reduced flexibility. Restoring flexibility can come at a significant cost.
If you have surplus cash flow you may be better served to direct as much of this as possible towards reducing your home loan debt. Your loan repayments will not necessarily decrease but over time you will pay less interest and repay more principal.
