Shhhhhh, if you sit very quietly and stare at the horizon you can see an independent rate rise peaking out behind those trees over there. We kid you not. But how do we know? The closing paragraph of last month’s RBA Minutes contained a surprise – “It was more likely that the next move in the cash rate would be up rather than down” – or could it have been viewed as an indication of what’s to come? Regardless, of which way you take the statement, the fact it was said and that Australian lenders are suggesting they will raise rates if the RBA won’t, should be enough for you to question if fixing your home loan is a good option.
So, what’s the bottom line? Well, Australian inflation is beginning to rise after a “not so good hiatus” and it appears that even our stagnating wages are moving on up. Plus, Australia borrows much of its funding from offshore sources – the US in particular. Given that US rates are on the rise, this means that short-term borrowing costs will increase. Consequently, our lenders will pass on this cost to us.
But, here’s the kicker: it’s not just the wholesale price of borrowing that will push up rates, but also regulatory costs. So, despite the Reserve leaving rates on hold, independent rate rises are likely to be made by Australian lenders to keep their costs down. In fact, we sawtwo lenders make a move early in April. Suncorp Bank and MyState hiked rates on a range of their mortgages, and lines of credit, by 25 basis points. Both lenders stated that the decision reduced increasing funding pressure.
Canstar and other mortgage comparison bodies suggest that these two lenders are just the icing on the mortgage cake, and that there will be many others following their steps over the coming months, especially those who rely on wholesale funding. In fact, research indicates that as many as 47% of Australian borrowers had experienced an out-of-cycle independent rate rise.
Data suggests that over the last 5-months lending costs have risen by 22 basis points. Thus, lender wholesale and retail portfolio costs have increased. Also, the Australian Prudential Regulation Authority (APRA) is continuing to raise holding capital requirements for investment and interest-only loans. Although, bigger banks, who have more significant deposit holdings may have more flexibility. Plus, these banks typically rely less on overseas’ funding.
So, how does this affect homeowners and investors, especially, those with more than one mortgage? Let’s take a look at the housing market to get an indication.
Dwelling Values and Avoiding an Independent Rate Rise
According to CoreLogic RP Data, there has been little change in national dwelling values during March. On a month-to-month basis, capital city property declined by 0.2%, while regional areas realised a 0.4% rise. Over the quarter, property prices nationally dropped by 0.9%, whereas regional areas saw a 1.1% growth.
Dwelling medians have also fallen in most capitals, which indicate that the Australian housing market is continuing to soften. However, these falls are believed to be due to weaker market conditions in Sydney.
Economists have also noted that there is a broad difference between unit and home values and rises and falls in prices. Units seem to be holding value far better than homes. In fact, Sydney unit values rose by 1.9% over the past 12-months. In comparison, house dropped 3.8% in value. Melbourne shows a similar trend with unit values rising by 6.6% of the last 12-months, and houses by just 4.9%.
With property prices across Australia declining, those with investment property and owner-occupier loans who are looking to hold until prices improve could benefit the most from fixing all, or some of their mortgage. This move could help them avoid an independent rate rise and also potentially manage their repayments long-term. However, if you’re looking to sell soon, then consider remaining variable, as this could give you the most amount of flexibility and will see you avoid paying hefty exit fees.