What is an Out-Of-Cycle home loan rates hike and how will this affect you?

Australian investors’ ears pricked up early March at news the big four banks were set to rise home loan rates. This is despite the fact the Reserve Bank had indicated it was going to keep the cash rate on hold.

Increases in global economic doubt and rising borrowing costs were cited as some of the contributing factors behind the decision. The need to alleviate the demand for loans as regulators consider whether additional controls are needed to protect Australia’s economy from being destabilised by record high housing prices in Sydney and Melbourne also played a part. This occurrence is what is known as an out-of-cycle home loan rates hike.

Out-Of-Cycle Or Out-Of-Touch?

As the term suggests, an out-of-cycle rate hike occurs when lenders increase interest rates out of sync with the RBA’s target cash rate. Out-of-cycle interest rate hikes are unpopular for many reasons, chiefly because they place further mortgage stress on property investors and owner-occupiers that may already be struggling to meet repayments.

At present, the RBA’s rate stands at 1.5 per cent, – unchanged during the last 6 meetings. Contrary to this however is NAB, CBA, ANZ Bank and Westpac, who have taken matters into their own hands and increased interest rates across the board for both interest only and interest and principal loans. Let’s take a look at where each bank now stands.

Where The Big Banks Currently Stand

NAB

  • NAB was the first of the big four banks in Australia to raise home loan interest rates earlier in March. Home loans rates for residential investment property owners has now increased from 5.55% to 5.80%

CBA

  • CBA has declared rate increases on loans for investment property owners with both principal and interest-only repayments. Principal and Interest-paid loans have now been raised by 24 basis points to 5.80%, while interest-only loans have increased to 5.94%

ANZ Bank

  • ANZ only announced changes to interest only loans. This means investor rates for new interest only loans has now risen from 5.85% to 5.95%

Westpac

  • Westpac has hit investment property owners with a home loan rates rise of 0.23% on principal and interest loans, which now sit at 5.79%. Interest-only loans have also increased to 5.96%

What does a home loan rates hike mean for the average investor?

As a worst-case scenario example, an investor with a variable principal and interest loan that’s risen 0.25% against $500,000 worth of debt can expect to spend an extra $1,250 per year or $104.16 per month on mortgage repayments.

Not exactly small change, especially since the RBA estimates that one-third of Australian borrowers have not built up a repayment buffer, or are less than one month ahead on their home loan repayments.

This leaves the average Australian homeowner or investor incredibly exposed to the very real threat of another rise in interest rates. Mozo spokeswoman Kirsty Lamont has commented on the situation by adding that borrowers “continued to be hit hard by out-of-cycle rate rises”.

Is This The Beginning Of The End?

Subsequent out-of-cycle rate hikes for both investors and owner-occupiers could also spark widespread economic downturn, due to the fact that a highly indebted household sector is likely to be more sensitive to declines in income and wealth, and may respond by drastically reducing consumption.

These hikes have also coincided with recent figures showing that only 11.6% of Australians see property as a viable investment – the lowest since The Melbourne Institute of Applied Economic and Social Research started the survey in 1974.

It seems that perhaps the property market pundits’ cries of “What comes up, must go down”, is conversely applicable in relation to lenders interest rates for the foreseeable future.


Resources

  1. Financial Review, James Eyres, Mar 24/2017, “Property investors punched by out-of-cycle interest rate hikes
  2. The New Daily, Jackson Stiles, Mar 17/2017, “Banks slammed for out-of-cycle rate hikes
  3. The Australian, Michael Bennet, Mar 23/2017, “Out-of-cycle rate hikes sink borrowers into deepening debt
  4. News.com, Sophie Elsworth, May 2/2017, “Big Four banks rake in large profits from out-of-cycle rate hikes
  5. HUFFPOST, Luke Cooper, March 24/2017, “The Big Four Banks Have Now All Made Increases To Home Loan Interest Rates

 

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