Reserve Bank puts break on cash rate, but expect out-of-cycle rate rises

Belinda Punshon 6 April 2016

expect out of cycle rate rises

Reserve Bank sits on the sidelines, but home loan customers shouldn't be complacent.

The Reserve Bank held the cash rate at 2.0% for the 11th consecutive month at yesterday’s Board meeting but mortgage holders shouldn’t sit tight just yet, according to 1300HomeLoan Managing Director, John Kolenda.

Despite the Reserve Bank’s “wait and see” strategy, home loan customers may face unexpected rate hikes in the months to come.

Last year variable rates rose by up to 29 basis points and investor loans increased by up to 49 basis points.

While it’s speculative, Kolenda says that out-of-cycle rate rises may occur over the coming quarter, and that major lenders may lift their home loan interest rates by 15 to 30 basis points at a given time.

“I think they’ll try to do it in one hit”, Kolenda says.

What causes out-of-cycle rate hikes?

The increased cost of funding coupled the Australian Prudential Regulation Authority's( APRA’s) regulatory requirements for deposit-taking institutions may prompt lenders to raise interest rates outside of the Reserve Bank’s deliberations. These compliances issues have increased the cost of providing mortgages, and this price increase will be passed onto customers.

Higher interest rates will take its toll on consumer confidence, however this may be offset by the Reserve Bank’s easing of monetary policy in the wake of a rising Australian Dollar (AUD).

“It [out-of-cycle rate changes] will have implications on consumer confidence but we’re likely to see the RBA move to reduce the rates, and hopefully this will negate the impact on consumers.  If they’re going to drop the cash rate and the banks increase rates, then the net position may be some sort of benefit for consumers”, Kolenda says.

How can I protect myself?

To safeguard themselves from potential rate rises, Kolenda says that mortgage holders must be diligent and evaluate their current position to see what’s on offer in the market. He encourages home loan customers to improve their interest rate with an alternative lender, where possible, as this could drive monthly savings.

Even a 0.5% rate reduction could lead to big savings. For instance, for a $500,000 mortgage at 5.5% interest over 30 years, the monthly repayment would be $ 2,838.95. However, if the mortgage holder found a lender with a rate that was 0.5% lower, the monthly repayment would shrink to $ 2,684.11. This would result in monthly saving of $154, or $1,848 per year.

With regard to Labor’s proposed negative gearing policy, Kolenda suggests that a potential outcome is that rent will go up which will directly impact those people looking to rent property.

“The slowing down of the market has already occurred if you look at the evidence in the last 2 quarters, there’s been a dramatic decline in the amount of investment properties being sold. I think prices will remain relatively resilient because we have an undersupply issue predominately on the Eastern seaboard”, he says.

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