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Australia's biggest bank unloads with its biggest ever rate hike

Australia’s largest bank has ended the fiscal year with a bang that will shake the foundations of many borrowers.

Commonwealth Bank of Australia's glass office tower building at Darling Harbour.
CBA is hitting fixed rate borrowers as it seemingly shifts its pitch towards variable rate mortgagees.

The era of rock-bottom interest rates has come to a screeching halt.

Australia’s largest bank has ended the fiscal year with a bang that will shake the foundations of many borrowers, and other banks were not far behind.

Commonwealth Bank (CBA) hiked fixed rates by a massive 1.40 percentage points for both owner-occupiers and investors on all fixed rate terms.

The following day, the other members of the Big Four made their moves to start the 2022-23 financial year with bold rate rises on fixed term loans.

By the weekend, ANZ and Westpac had moved all terms by 0.9 per cent and 0.5 per cent respectively, and NAB announced 0.8 to 1.1 per cent rises for terms on its Tailored Home Loan.

RateCity.com.au Research Director, Sally Tindall, said CBA's mammoth increase represented the biggest one-off rate hike by the bank since they kept records.

“Less than a year ago, CBA was still offering one fixed rate under 2 per cent - today the bank’s lowest fixed rate is just under 5 per cent, while the majority are well over 6 per cent.

“It’s incredible to see fixed rates move this dramatically in such a short space of time and now the sub-2 percent fixed rates from 12 months ago seem like a distant dream.

“We expect other banks will follow in CBA’s wake.

Westpac and NAB’s fixed rates are now, in many cases, over a percentage point lower but it’s only a matter of time before these banks hike fixed rates again.” 

The University of Queensland Business School’s Finance Lead, Professor Shaun Bond, said a shift in the market was unfolding as banks adjust their loan rates in response to the changed funding conditions.

This explains why many fixed rates are now well above variable rates and with the RBA forecast to continue to increase rates in response to the high inflation figures, the cost of locking in longer term funding is now well above the rates we saw last year,” Professor Bond told Australian Property Investor Magazine.

What we are seeing is primarily a response to the increased cost of funding for the banks.

In addition, with increased uncertainty about the future path of house prices, banks are not competing as aggressively in the loan market as they were in the past.

Many of the best fixed rate loan terms were issued at low margins as a way to gain market share but with less competition the banks are winding back on the incentives they used in the past,” Professor Bond said.

Death knell

The unprecedented hit on borrowers marks the death knell to a period of historically low interest rates.

Before the May cash rate rise, Canstar listed 68 rates below 2 per cent, while a year ago there were 193 rates available below that figure. 

Now there are none.

Canstar’s finance expert, Steve Mickenbecker, said the May and June Reserve Bank cash rate increases put an end to an era of home loan interest rates below 2 percent, which he described as “something we may never see again”.

“For the past year, borrowers have been alerted to the opportunity to save by switching to loans below 2 percent.

“If the Reserve Bank continues rate increases as expected in the second half of 2022, that benchmark for low rates will soon be 3 percent. 

“Many of the lowest interest rate loan providers 12 months ago still have the lowest rates today but what’s changed is that these rates now start with a two instead of a one.

“In switching to one of the lowest variable rates in the market today, borrowers can still reset their average loan rate to a low start point for future increases, which still means large savings over time. 

“The lowest rate on Canstar today is 2.24 percent for a loan with 30 percent equity, making refinancing still very attractive to most borrowers.” 

Professor Bond said banks were now being more selective and cautious in their lending decisions as the property market started to turn around.

In addition to the interest rate charged, banks also compete on other loan terms.

With uncertainty about the future path of house prices, many banks are reassessing the risk of each loan and pricing low deposit loans (high loan-to-value loans) at higher margins.” 

CBA looks to variable loans

As it slammed most borrowers, CBA also cut its lowest variable home loan rate by 0.15 percentage points, down to 2.79 per cent with one major catch – the revised rate is only for new customers with a 30 per cent deposit.

The change comes less than two weeks after the bank hiked rates for both new and existing variable customers by 0.50 percentage points, following the June double cash rate hike.

Lowest home loan rates ($500k, Any LVR, P&I)

Rate Type Provider Loan Max LVR Rate Comparison Rate
Variable Resi & Yellow Brick Road Select Variable Home Loan P&I ≤70% 70% 2.24% 2.27%
1 Year Fixed LCU Introductory Home Loan 1 yr 80% 2.59% 3.63%
2 Year Fixed Bank of us FlexiDiscount Fixed 2 yrs 80% 80% 3.79% 2.94%
3 Year Fixed Easy Street Fin Services Easy Street Fixed P&I 3 yrs 95% 4.29% 2.91%
4 Year Fixed bcu Residential Fixed P&I 4 yrs 95% 4.49% 4.70%
5 Year Fixed bcu Residential Fixed P&I 5 yrs 95% 4.64% 4.74%

Source: www.canstar.com.au - 28/06/2022. Based on owner occupier loans on Canstar's database, available for a loan amount of $500,000, any LVR and principal & interest repayments; excluding first home buyer only loans. Comparison rate calculated based on a loan amount of $150,000 and loan term of 25 years. Lowest rate selected based on the lowest rate, followed by the lowest comparison rate.

“While CBA might have turned its back on competition in the fixed rate sector, it has got its eyes squarely focused on reeling in new variable rate customers,” Ms Tindall said.

“Today’s cut to CBA’s Extra Home Loan brings the bank’s lowest variable rate down to a relatively competitive 2.79 per cent, however, existing customers should think twice if they’re expecting to get this rate.

“Once again, loyal customers are getting the raw end of the deal, so CBA customers on the Extra Home Loan should call up the bank and ask for this discount.

“If the bank doesn’t budge, it could be time for them to take their home loan shopping to a bank willing to lower their rate,” she said.

Darren Venter, Co-Director The Investors Agency said CBA's strategy may be a clever marketing tool.

“If we were to speculate, could CommBank’s almost 2.2 per cent difference between fixed and recently reduced variable rates be an intentional supplying of low hanging fruit to attract borrowers, and bait them into moving their mortgages over to a lower variable rate with a reputable lender, so that they can continue to dominate market share and gain from planned rises in the near future?

Time will tell.”

Professor Bond added that while the best rates have disappeared, mortgage rates are still low by historical standards.

“Shop around, of course, but think carefully about your own risk preferences.

While fixed rates are now more expensive than variable rates, some people might prefer the certainty offered by the fixed rates.

The banks' shift towards trying to attract variable rate business is seen with ME Bank also joining CBA in cutting some of its variable rates. Macquarie Bank also cut variable home loan rates by up to 25 basis points last week and ANZ made a similar move in May.

Banks save, customers left short

Savings rates, meanwhile, are not seeing the same response to the RBA hikes.

CBA made a token increase to only the introductory rate on its popular NetBank Saver account by 0.30 per cent. It will only benefit new customers for the first five months. ANZ on Thursday (30 June) increased rates on two of its most popular savings accounts, its Progress Saver and Online Saver, by 0.25 percentage points, still well below the cash rate hike by the RBA.

“Savings rates are finally crawling north, but it’s happening at a snail’s pace,” Ms Tindall said.

“After each cash rate hike, there are banks lifting rates on some accounts but not all, other banks opting to pass on just part of the hike, while a handful have skipped over their existing customers entirely.

“The RBA is poised to put a rocket under the cash rate, with many economists predicting it will climb to over 2 per cent by the end of this year.

“This should be good news for savers, however, based on what we’ve seen so far, most existing customers are unlikely to reap the full benefit of these hikes.” 

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