An interest rate increase of 0.20% has been announced by Westpac this week, with the rate hike applying to all mortgages, whether owner occupied or for investment purposes.
It’s not the best news property owners have heard of late, but there’s no need to despair just yet.
In the last month or two, a number of banks and lenders announced an interest rate increase of up to 0.47% on investment property mortgages. This was in response to action taken by the Australian Prudential Regulation Authority (APRA), which is enforcing new regulations that ultimately have the effect of increasing the cost of providing mortgages.
APRA isn’t doing this just for kicks – they’re worried about certain over-heated parts of Australia’s property market, and they want to ensure our banks remain amongst the safest in the world.
But here’s the corporate reality: banks are in the business of turning profits. Big, billion-dollar profits.
When APRA came along and enforced regulatory change that impacted their bottom line, then the banks were forced to look for other avenues to increase their income.
Westpac has become the first of the ‘big 4 banks’ to raise rates out of cycle in response, but I don’t believe they will be the last.
Interestingly, I was chatting to a contact at RAMS (which is owned by Westpac), and he confirmed that RAMS will not be following suit and raising their mortgage interest rates. The increase only applies to Westpac-branded loans at this stage, not St George, Bank of Melbourne or BankSA.
But in my view, it’s only a matter of time before other major lenders begin following Westpac’s lead.
Where does this leave mortgage-holders?
Obviously, a rate increase is never good news, but property owners shouldn’t be panicking just yet.
It’s quite likely that the Reserve Bank will reduce the official cash rate in the near future, perhaps as early as Melbourne Cup Day – although, I don’t think it will be because of Westpac’s latest move.
One of the primary goals of the RBA is to stimulate business investment and at present, our economy is not in good shape.
In announcing its October 2015 decision to leave rates on hold at 2.0%, Glenn Stevens confirmed that “[economic] growth has been somewhat below longer-term averages for some time”, adding that “monetary policy needs to be accommodative”.
The retail sector is about to experience it’s busiest and most profitable time of the year, and if Christmas shopping spending isn’t robust and localised – meaning consumers opt to spend their retail dollars within Australia, rather than purchasing from overseas – then that will put further pressure on the economy.
As a consequence of this, and myriad other influences, a move by the RBA to reduce the official cash rate seems imminent.
That said, I’m not certain that any rate relief from the central bank will be passed on in full by lenders. We may also see further bank-initiated increases interest rates across the board, due to the pressure to comply with APRA’s requirements by mid-2016.
With any luck, from a mortgage perspective, the two will ultimately balance each other out and you won’t see your home loan interest rate break the 5% barrier any time soon. Of course, if you’re concerned about your mortgage or you’d like to structure your loans differently to lock in rate certainty by fixing, we are happy to help. Contact our team for a chat today.
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Philippe Brach is CEO of Multifocus Properties and FinanceDisclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
