Interest rates are rising. What does it mean for you?
Australia’s major lenders have recently announced rate rises, starting with Westpac on September 19th. Here we look at the reasons behind the rise and what it means for you.
At the end of August, Westpac announced that it will raise its mortgage rates out-of-cycle, the first major lender to do so. This increase affects the bank’s variable rates, which means it affects both residential investment and owner-occupier loans. Each will see an increase of 0.14% and the raise will affect both current and new borrowers.
Then at the beginning of September, both ANZ and CommBank followed suit. Interestingly, they’ve also increased their rates more than Westpac did. CommBank announced a 0.15% increase while ANZ introduced a 0.16% increase.
The Reasons Why
Westpac’s chief executive, Brian Hartzer, gave some insight into the reason behind the move. He points to the “sustained increase in wholesale funding costs” its faced during 2018 as the major problem.
He added that the bank didn’t want to make the decision. Yet, it was essential to ensure their mortgage arm remained profitable. After all, they believe that the increases in wholesale funding will continue for several years.
The move also comes during the longest period Australia has ever gone without a cash rate change.
The rate has stood at 1.5% since August 2016.
It appears that this combination of a stagnant rate and rising costs are the culprits. Johnathan Mott of investment banking giant UBS reinforces this opinion. He says: “The repricing today offsets the pressure from funding costs and is equivalent to more than half an RBA rate rise to its customers.”
What Do You Need to Know?
So, what do homeowners and residential investors need to know about the rate increase? Since Westpac were the first of the Big Four to hike rates, let’s take a closer look at their numbers.
Westpac’s increase took effect on 19th September and it impacts people who have a variable rate owner-occupier or residential investment loan.
Here are the raw numbers for Westpac’s four main variable loan types.
Standard Principal and Interest (P&I) loans for owner-occupiers will see a rate increase to 5.38%.
Standard P&I loan rates for residential property investors will increase to 5.93%.
Standard interest-only loan rates for owner-occupiers will shoot up to 5.97%. This increases to 6.44% for residential property investors.
What does that mean in real terms?
For the average $750,000 loan with a 30-year term, an owner-occupier’s repayments will increase by $87.5 per month.
That goes up to $175 per month on a $1,500,000 loan, creating an annual increase of over $2,100.
Simply put, those who have standard variable loans will find themselves paying more. Those on fixed rates obviously avoid the increase for the time being. However, they will have to deal with it when their loan reverts to a standard variable loan.
Furthermore, these extra outgoings are higher for standard variable loans with ANZ and CommBank. Why? Because they’ve both introduced even larger rate increases.
This comes at an inopportune time for many Aussies. Though house prices have cooled during 2018, affordability is still a major issue for many. This is particularly the case in major cities, such as Sydney and Melbourne.
This rate increase adds more pressure to already stretched bank balances.
Interest rates are forecasted and expected to keep rising therefore we strongly recommend all our clients consider fixing a portion if not a majority of their existing mortgage debt. For Pre-Approved clients looking to purchase yet still haven’t secured a property, there is the ability to apply for a Rate Lock to secure current fixed rates on offer. Rate lock terms vary significantly amongst banks and lenders so please consult your Shore Financial Credit Adviser to understand all options.
Both owner-occupiers and residential property investors need to take note. Their annual interest payments will rise by several hundred dollars as a result of these increases. That makes it all the more important that you’re diligent when searching for home loan products and make sure you’re getting the appropriate advice.