Some interesting information and data has been released this week which I would like to discuss with you.
Variable mortgage rates will probably rise soon
Interest rates that apply to interbank lending have increased significantly since the beginning of the year. These benchmark rates are used to set the banks borrowing costs. This benchmark rate has increased significantly compared to the RBA’s cash rate as depicted in the chart below (from
Montgomery). Essentially, this means it costs more for the banks to borrow. Between approximately one quarter and one third of the banks mortgages are funded through facilities that are linked to these short-term indicator rates. Therefore, it has been estimated that the banks cost of funds have increased by circa 0.10% p.a.
Various second tier lenders such as ING, BoQ, IMB, Citibank, Bank SA, and ME Bank have already increased variable rates.
Pressure will be on the Big 4 banks to follow. However, I suspect that they haven’t increased yet because they are worried about the inevitably bad press that it would attract – particularly for the bank to move first. That said, if these higher costs persist then they might have to lift variable interest rates sooner rather than later (probably by around 0.10% p.a.).
Can you afford principal and interest repayments?
There has been a bit of
press lately about a possible looming credit risk i.e. interest only loans converting to principal and interest repayments which might put negative pressure on borrowers cash flow.
If you have a loan on interest only repayments that is approaching its expiry date, you have a few options. You should consider whether you are better off with principal and interest repayments – see
this blog. If not, speak to us and we can investigate whether you can roll over to a new 5-year interest only term with your existing or a new lender. Do it sooner rather than later to avoid the risk of being caught by any future changes or credit tightening.
The Reserve Bank (RBA) and interest rates
The main thing holding back the RBA from increasing the cash rate is the rather ‘benign’ infla
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