Rising Interest Rates on the Horizon

Jul 5, 2018 | Global Property

The banks are likely to raise interest rates independent of the RBA.

The Reserve Bank of Australia (RBA) has kept mortgage interest rates on hold for the longest stretch in history. Since August 2016, a persistent and record low of 1.5% has prevailed. There has been a silence surrounding an increase in cash rates, prompting analysts to incur that rates may remain low into the second half of 2019.

However, there is a good chance that interest rates may increase out-of-cycle. Here’s why.

The chart below shows the spread between the RBA cash rate (in black) and the average discount variable mortgage rates. The interest rate spread between the cash rate and three-month bank bill swap rate (BBSW) – the prices at which Australian banks lend to each other (interbanking lending rates) – is indicated in red.

The spread between cash rates and mortgage interest rates has increased from 120 basis points to 300 basis points. The higher funding costs for banks and financial stress points to a possible increase in home loan rates, as has been the case most often.

Small banks derive around 20% of their banking funds from short-term sources. The cost pressure on the big four banks is not as severe as bank deposits account for a bigger share of their funding.

Smaller financial institutions have announced an increase in variable mortgage rates, and it won’t take long for big banks to follow suit. The Bank of Queensland said it would increase variable home rates by 0.09% for owner-occupiers and by 0.15% for investors. Auswide (0.13% for investors, 0.05% for owner-occupiers), AMP (0.4% on new variable interest-only loans), IMB Bank (0.08% on new and existing mortgages) and Suncorp have already lifted mortgage interest rates.

The spike in short-term borrowing costs can be partly traced to the tightening of monetary policies by the Federal Reserve and European Central Banks. The reason it affects Australia is because we are dependent on foreign capital to fund our economy given our paucity of savings relative to investment.

The writing on the wall is clear: the cost of money or the average interest rate at which you are able to borrow money is rising and interbanking lending rates are tracing higher levels. The RBA will not let it get to unsustainable levels but there will be an impact on mortgages.

If you have a current mortgage or will be buying property soon, it pays to meet with a good broker for guidance as to what to expect and plan for.

<a href="https://ugc.net.au/author/brett/" target="_self">Brett Dickinson</a>

Brett Dickinson

Brett is a Licensed Real Estate Agent and manages United Global Capital's property projects and client acquisitions.

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