RBA holds rates as banks continue to tweak

Australian banks continue to chop and change interest rates for fixed rate home loans, as the Reserve Bank of Australia maintains there will be no movement of the official cash rate from its record low for several more years.

RBA governor Philip Lowe today announced that the central bank’s board of directors saw no reason to change the official cash rate from its historic low of 0.1 per cent.

Dr Lowe also reiterated that the cash rate would likely not be increased until 2024 at the earliest, as while the economic recovery was under way and stronger than expected, unemployment remained high and wage growth was subdued.

“The Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range,” Dr Lowe said.

“For this to occur, wages growth will have to be materially higher than it is currently. This will require significant gains in employment and a return to a tight labour market. The Board does not expect these conditions to be met until 2024 at the earliest.”

In respect to Australia’s rising house prices, Dr Lowe said the RBA would be watching loan markets carefully.

“Housing credit growth to owner-occupiers has picked up, with strong demand from first-home buyers. In contrast, investor credit growth remains subdued.

“Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”

Laing + Simmons Corporate managing director Leanne Pilkington said the recent phase-out of government income support was likely a factor in the RBA’s thinking.

“The Reserve Bank has doubled down on its declaration that rates will remain low for some time to come and with JobKeeper now out of the picture, this is not the time to review this approach,” Ms Pilkington said.

“The onus now falls on Government to create as soft a landing as possible for consumers affected by the removal of this stimulus, and businesses too, as a consequence.”

Australian banks however, are beginning to price in a rate rise within four years.

Research from RateCity.com.au showed there had recently been a flurry of fixed rate changes, with two and three-year loans being reduced, while several banks had moved to hike four-year fixed terms.

RateCity said 11 lenders had increased their four-year fixed rates in the past month, including Commonwealth Bank of Australia, Bendigo Bank and Aussie Home Loans, while two other lenders cut them.

“Over the last month, the majority of one- to three-year fixed rate changes have been cuts, not hikes, as lenders make the most of the low-cost funding available,” RateCity research director Sally Tindall said. 

“However, in the last month the majority of four-year fixed rates changes were in the opposite direction as some banks start to factor in a likely rise to the cash rate in 2024 and the end of the RBA’s term funding facility on 30 June this year. 

“The big question is whether Westpac will hike its four-year rate. Australia’s second largest bank currently has the lowest four-year fixed rate in the market. Hiking this rate could lose the bank its competitive edge in this category. 

“Watching these four-year rates come off the table has some people panicked they will miss the bottom. Just because these rates could be soon rise, doesn’t mean you should rush out and fix for the next four years. 

“If you are looking to refinance, work out what type of mortgage suits your finances, then shop around for a competitive rate, not the other way around,” she said. 

The decision to hold steady means that the RBA hasn’t hiked rates for more than a decade, with the last increase occurring in November 2010.

Since that hike, more than 1 million loans have been signed by first home buyer owner occupiers. 

Ms Tindall said it was extraordinary to consider that so many homebuyers had not experienced an RBA rate hike. 

“The concern is, some people fighting tooth and nail to get into the property market today haven’t thought about whether they can meet the repayments in three- or four-years’ time,” she said. 

“Fixed loans in a rising interest-rate market can be a great tool to help people budget, that is until the music stops. 

“When applying for a mortgage, banks factor in a 2.5 per cent buffer on the ongoing rate. However, people should stress-test the loan for themselves. 

“If you’re taking out a fixed home loan today, make sure you can afford the repayments when the revert rate kicks in, factoring in potential RBA hikes and a safety net. 

“Consider re-fixing, refinancing or renegotiating your home loan to lessen the blow when your fixed rate term ends. 

“Over one million first home buyers have only experienced cash rate cuts. The next hike might still be three years away but when it comes to a 30-year mortgage, you need to think long term.” 

Finsure managing director John Kolenda said he expected lenders to increase fixed rates across the board, due to recent increases in funding costs. 

“Bond market pricing is on the way up with an increase in rates over the next 12 months,” Mr Kolenda said. 

“The Commonwealth Bank last month became the first of the big four to move upwards on long-term fixed mortgage rates. Fixed rates appear to have bottomed out and consumers with existing home loans should consider fixed rates as an option before they start to rise. 

“You can secure some of the lowest ever interest rate pricing with a fixed rate. But this needs to be carefully considered.  Fixed home loan rates can provide certainty to borrowers or you can take a part fixed and part variable rate to allow for some flexibility.” 

Homeloanexperts.com.au chief executive Alan Hemmings said today’s decision by the RBA was expected, despite the concerns over rapidly heating property markets. 

“While the RBA will be watching affordability closely over the next few months and we may see some regulatory measures in the future, it would be premature to increase rates at this stage,” Mr Hemmings said. 

“What I do expect to see is low fixed rates begin to rise as the government slows its term funding facilities for lenders.”