On Tuesday, 3rd May the RBA dropped the official cash rate by 0.25% to 1.75%. However last month we have heard multiple warnings from within the finance industry’s top echelons that out-of-cycle interest rate rises in Australia are imminent.
It appears the warnings come as increases in global economic uncertainty, lenders borrowing costs and regulatory compliance costs may force banks to increase home loan interest rates.
Peter White, the CEO of the FBAA has warned of the “perfect storm for interest rate rises” believing rate hikes could begin shortly and continue over the next 12 months.
It appears the Australian Banking regulator APRA, are preparing for the worst. Wayne Byres, the chairman of APRA, told the Australian Financial Review (AFR) Banking and Wealth Summit in Sydney recently that capital requirements were likely to continue to move higher in 2016 to ensure our Australian Banks are “unquestionably strong” as recommended by the Murray Financial System Inquiry (FSI).
Last year in response to APRA pressure we saw variable interest rates increase, out-of-cycle (i.e. independent of any Reserve Bank movements), by up to 0.29% and investor loans by up to 0.49%. This year APRA appear to be tightening the screws on Australian Banks again.
Recently, the Bank of Queensland (BOQ) have announced, effective 15 April, variable interest rates will be increased by 0.12% for owner-occupiers and 0.25% for investors. BOQ CEO Jon Sutton advised this was due to “the fiercely competitive market and increased funding spreads and hedging costs”. “This is not a decision that was made lightly” he said but “these increases are necessary”. This on the back of NAB increasing interest rates by 0.15%, effective 4 April, to investors with a Principal & Interest (P&I) loan.
What should you do about this?
The key here is not to panic but to prepare. The first step in that preparation is to determine how much a rise will affect you.
This isn’t a difficult calculation. If interest rates were to rise by say 0.25% and you have $500,000 worth of debt then it will cost you $1,250 extra per year or $104.16 per month ($500,000 x 0.25% = $1,250 / 12 = $104.16).
If interest rates were to rise by 0.49% and your debt is $350,000 then your financier would be chasing you for an extra $142.91 per month ($350,000 x 0.49% /12).
Getting Professional Help
If the extra monthly figure you calculate concerns you, then you may want to talk to a professional Credit Adviser.
If you weren’t already aware, Stonehouse started a Credit Advice arm in November 2014. See Loan Solutions for more information.
Our experienced Credit Advisers regularly negotiate with lenders and secure interest rates for customers that are not available by walking into your local branch.
Any interest rate increases coming this year can usually be mitigated by a review, and a subsequent renegotiation or refinance of your home and investment loans.
Furthermore, there are some 3 to 5 year fixed rate loans available at the moment that are some of the lowest interest rates ever offered in Australia. Now could be the perfect time to lock in all or part of your loan.