Why are banks raising interest rates out of cycle?

Commonwealth Bank, ANZ, NAB, Westpac and St George have all made out-of-cycle increases to their mortgage interest rates. While many investors were expecting this, the big shock has been that rate hikes are impacting both investment and owner-occupier loans.

In January this year, investor borrowers accounted for more than half of home loans taken out. So it’s little wonder that these increases have been introduced, driven by concerns about the rapid growth in investor loans, and fears that the Australian Prudential Regulation Authority (APRA) will further tighten lending standards.

The latter concern turned out to be well founded – as APRA revealed some new clampdowns at the end of March.

They announced that interest-only loans must be restricted to 30 per cent of new residential mortgage loans going forward.

Now, in the wake of no fewer than 14 banks and lenders hiking interest rates for variable loans, borrowers are scrambling to figure out their next move.

Investors still hungry for loans

APRA first began imposing stricter conditions on investment lending back in early 2015, but it hasn't done enough to “cool down unsustainable housing prices in Sydney and Melbourne,” says Kirsty Lamont, director of rate comparison website Mozo.

Banks are claiming the rate rises for interest-only loans for investors and owner-occupiers are due to “rising costs and regulatory responsibilities”, and have cited the need to maintain “prudent lending practices”.

It’s not a great surprise that we’re seeing these rate rises from the big four banks and other lenders. Raising rates out of cycle was just a matter of time.

As a report from JP Morgan suggests, the aim of the increases is to offset higher funding costs and preserve margins, so the banks can continue to compete via discounting on new loans in the owner-occupied space “where there is greater political focus, and fewer regulatory concerns”.

There has been some suggestion that if banks really wanted to cap growth in new loans, they would do so by tightening up credit criteria rather than just making them more expensive. However, as we know, the banks' first commercial priority is to maximise shareholder profits while minimising risks.

As we’ve said: these increases are not too surprising, as they’ve been hinted at for many months. What matters now for mortgage holders is creating a strategy to move forward.

Is now a good time to fix your rates?

Many people – both investors and owner-occupiers alike – are now concerned about whether rates will continue to rise. This is definitely a volatile time in the mortgage market and, if it suits your situation, now may be a good time to reassess your cash flow and look at locking in your interest rates, before there are any further increases.

If you’ve missed the chance to fix rates at their lowest, don’t despair; there are still many great value rates in the market. You may want to consider fixing at least a portion of your home loan, though remember that there may be substantial costs involved if you exit the loan before the fixed term expires.

The most important thing to do right now is not to rush. If you have a home loan, whether for an investment property or as a homeowner, feel free to contact us at Multifocus Properties and Finance for an obligation-free chat. We spend our days working with a range of lenders to help our clients get the best deal to suit their situation; to talk further about how we may be able to help you save money on your mortgage, call our finance team on 1300 905 680.