Why are lenders raising their home loan interest rates?
All ‘big four’ banks lifted their variable mortgage rates in October, without any move from the RBA
It appears that the industry has a clear rationale to increase rates independent of the Reserve Bank, as stipulated by the Australian Prudential Authority’s (APRA) demand for deposit-taking institutions to raise additional capital against their mortgage portfolios.
Who set the pace?
Following APRA’s statement that the “risk weighting” for home loans needed to increase from 16% to approximately 25%, many of the big four have taken measures to raise additional capital against mortgage products.
The first shot was fired by Citibank on October 1 after an increase to its variable rates of 0.20 percentage points was announced.
On October 14, the first of the big four, Westpac, announced its decision to lift its variable home loan interest rates by 0.20 percentage points and was soon followed by the Commonwealth Bank on October 25 when it also announced an increase to its standard variable home loan rate by 0.15 percentage points.
NAB joined soon after announcing its intention to increase 0.17 percentage points. ANZ Bank was the last of the big four to increase mortgage rates independent of the Reserve Bank and raised interest rates by 0.18 percentage points, increasing its variable rate to 5.56% for owner-occupiers and 5.83% for property investors.
Find out how these rate rises will increase the Commonwealth Bank and Westpac’s returns.
Which lenders have raised rates so far?
|Bank||Current standard variable rate||Rate change||New standard variable rate||Effective date|
|Adelaide Bank||5.56%||+0.12%||5.68%||November 20, 2015|
|AMP||5.54%||+0.18%||5.72%||November 20, 2015|
|ANZ||5.38%||+0.18%||5.56%||November 20, 2015|
|Bank of Queensland||5.56%||+0.18%||5.74%||November 20, 2015|
|Bankwest||5.47%||+0.18%||5.65%||November 17, 2015|
|Bendigo Bank||5.56%||+0.12%||5.68%||November 20, 2015|
|Citibank||5.74%||+0.20%||5.94%||November 30, 2015|
|Commonwealth Bank||5.45%||+0.15%||5.60%||November 20, 2015|
|CUA||4.93%||+0.13%||5.06%||November 24, 2015|
|ING DIRECT||4.84%||+0.18%||5.02%||January 15, 2016|
|Macquarie Bank||5.50%||+0.20%||5.70%||November 20, 2015|
|ME Bank||4.88%||+0.20%||5.08%||November 20, 2015|
|NAB||5.43%||+0.17%||5.60%||November 12, 2015|
|St.George||5.54%||+0.15%||5.69%||November 20, 2015|
|Suncorp||5.54%||+0.16%||5.70%||November 20, 2015|
|Westpac||5.48%||+0.20%||5.68%||November 20, 2015|
How much capital has to be raised?
Westpac claimed that it would require a further $3 billion of capital to lift its common equity tier 1 (CET1) ratio to between 8.75% and 9.25%, whereas ANZ said it would need to allocate approximately $2.3 billion of extra capital.
Commonwealth Bank told the ASX that the change would increase the amount of CET1 capital required for mortgages by approximately 95 basis points from July 2016 while NAB said the impact would be around 70 basis points on its recent capital ratios, announcing a $5.5 billion capital raising to provide leeway for these regulatory changes.
Why have the big four raised their rates?
Both ANZ and NAB have cited market conditions as well as regulatory changes which require lenders to boost the amount of capital they hold against their home loan portfolios. In theory, the banks need to hold larger capital buffers as a precautionary measure to absorb potential losses on home loan products.
Regulatory changes on capital requirements also increase the costs associated with providing home loans which may explain why lenders have passed this cost increase onto consumers. It is believed that lenders are attempting to balance the interests of their stakeholders- notably the needs of its customers with those of its shareholders- via variable rate hikes.
With rates at a historic low, the Banks judged that a rate rise was the necessary course of action to respect new market and regulatory conditions.
However, the series of rate changes made outside the typical RBA cash cycle has emphasised the commercial needs of the banks and their response to changes in their cost base.
Will the trend continue?
It is believed that further out-of-cycle rate rises may be on the horizon as further repricing may be required to accommodate for higher capital requirements on home loans.
However, smaller regional banks are not obliged to raise more capital as they already had to hold higher levels due to the far higher risk-weightings for their mortgages. In a sense, APRA is ensuring that larger lenders endure the same level of risk as regional banks.
What does this mean for me?
Below you can use our calculator to find out how a rate rise will change your mortgage repayments over the life of a variable home loan.
Here are some ways you can prepare for future rate rises.
- Create a buffer of funds: Like any investment, it’s a good idea to have a contingency buffer of funds that you can easily access in the event that your mortgage repayments increase dramatically as a result of a rate rise. When estimating how much you can borrow, you should factor in the cost of rate rises to ensure that you are able to cope with the added financial pressure.
- Refinance: If your lender has announced a rate rise, now may be the time to consider switching to another lender that offers a more competitive rate. However, be mindful of the complete cost of refinancing your home loan and take note of any switching fees or application fees that may apply.
- Have a larger deposit: When obtaining a home loan, you should aim to complete at least 20% deposit so you can avoid paying Lender’s Mortgage Insurance (LMI). The lower your loan amount, the less interest you will have to pay over the life of the loan. You can use our calculator to estimate how much you can afford to borrow to avoid the risk of overcapitalising.
- Utilise a split loan: Some owner-occupiers and investors split their loan which means a portion of the loan is attached to a fixed rate and the remaining portion is attached to a variable rate. A split loan can give you the peace of mind of the certainty and stability of a fixed rate, as well as the ability to leverage a lower variable rate.
Some economists predict that the rate hikes made by the big four, among other major lenders, could prompt the Reserve Bank to cut the official cost of borrowing to offset the impact on Australian households.
Thinking of refinancing? Compare current home loan offers.
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