If you’ve owned a house for a few years, you’re probably familiar with the way things used to be with interest rates. The RBA would meet on the first Tuesday of each month to make a decision about the cash rate. The Board would announce their decision and homeowners would sit with baited breath, waiting to see how the lenders would react.
- Who would be the first lender to increase their rates this time around?
- If the cash rate fell, would the lenders pass on the rate cut in full?
- How would the rate change affect our monthly repayments?
However, in recent times home loan rates have become a bit more complicated because the rates on offer differ according to the loan type, the repayment type and the colour of your jacket. (Ok, maybe not the last one but you get the point).
We’ve previously discussed interest rates from a borrower perspective here, but we wanted to look at the main factors impacting the way a lender prices their rates and explain what’s been happening to home loan rates recently.
What affects home loan rates now?
The lender’s broader strategy will of course come into play.
For example:
- Is the lender offering a lower rate to cut through to a particular niche market?
- Is the lender offering aggressive pricing against a particular competitor?
- Is the lender solely focused on shareholder satisfaction?
But perhaps the main consideration is the ‘cost of funding.’ The cost of funding is the expense incurred by lenders to source the funds they then lend to borrowers. Lenders acquire funds from bank deposits as well as short to long-term funding options.
Recently there’s been a shift towards lenders relying on bank deposits as their main funding source, which is in part due to the introduction of the Net Stable Funding Ratio (NSFR). However, lenders still rely on short and long-term debt funding sources, meaning that any changes to this market will affect their cost base.
Over the last few months, we’ve watched the gap widen between the bank bill swap rate and overnight cash rate. This means lenders are now paying more for funds they acquire via debt. Basic business principles suggests that if lenders are not charging more (by way of interest) for the funds they lend out, because they’re now paying more to acquire these funds, their profit margins are narrowing.
This ‘squeezing of profits’ is the reason second-tier lenders have given when asked to explain why their home loan rates have increased over the last month.
There’s always the argument that lenders are already making too much profit and they should be able to absorb increased funding costs. However, that’s not really the point of this article and something we won’t get into.
We feel it’s more proactive to spend time on things we actually have some control over. We want to be able to thoroughly explain to our clients what’s happening in the market so we can advise (and implement) the appropriate course of action.
What’s happening to YOUR home loan rate?
Over the last month, some second-tier lenders have increase their home loan rates, citing they can no longer fully absorb the rising funding costs.
Whilst it’s expected the majors will follow in due, we can’t be sure of when it may occur and by how much the rates could increase.
What we are certain of, is that any rate changes will be specific to each lender and vary between loan and repayment types as different pricing structures already exist for Interest Only vs Principle & Interest repayment loans and Owner Occupied vs Investment loans.
With this in mind, it’s not unreasonable to consider a lender may choose to offset the higher funding costs by increasing rates on some of their loans and not others. Or perhaps they may increase their rates on a particular type of loan by a higher margin than others, especially if there’s another strategy at play.
There’s been changes to fixed rates on offer too. (If a fixed rate loan is something you’re thinking about, find out more here.)
What you can do about potential rates changes?
Regardless of what happens to your interest rates, it’s important to remember that right now, rates are historically low.
They’ve been low for some time now and nothing stays the same forever.
Ensure you’re well positioned to handle any rate increases by checking you’re not currently spending more than you have to.
With all the rate offers available, it’s increasingly difficult for even the most mortgage-savvy home owner to work out if their loan is still the right one for them.
If you need some help, give us a call on 02 6286 6501.
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This post was published 31 July, 2018. This information here is provided for general purposes only and does not constitute financial advice. Before any specific lending or loan structure is recommended to you personally, a thorough Preliminary Assessment would need to be conducted to ensure any credit advice provided by MO’R Mortgage Options is not unsuitable for your specific financial situation.
