Over the past two weeks, the Big Four and many smaller lenders have raised interest rates across their lending books, in step with each other but out of step with the Reserve Bank. So while the RBA’s official cash rate remains at the historically low level of 1.5%, loan repayments are ballooning.
“The commercial banks, even though the cash rate hasn't moved, are repricing their loan products because their funding costs are now higher,” Stephen Walters, chief economist at the Australian Institute of Company Directors (AICD), told ABC News.
Walters links the major repricing across the board to events that took place before the 2016 US presidential election. “Just before the presidential election, bond yields in the US were below 2 per cent. This is 10-year bond yields. Now [they're] up around 2.5 per cent. So that's about 80 basis points higher than they were four or five months ago,” he said.
However, not all economists buy this explanation. Omkar Joshi, banking analyst at Regal Funds Management, doesn’t think the banks’ rate rises are due to increased wholesale lending costs. Instead, he thinks banks have found a politically astute way to boost their profits.
“The reality is [it has] been really hard to raise rates, especially out of cycle with the RBA," he said. “The politicians are always on the back of the banks, basically, and every time they lift rates [politicians are] very quick to jump on the banks.” Instead, the banks focus on repricing investor loans, rather than owner-occupier loans, and “nobody says anything,” mainly because the regulators are trying to control investor lending growth.
Recent data from the Australian Bureau of Statistics and the Reserve Bank make it clear that investors are back with a vengeance in the national housing market. This is worrying the RBA, which believes that the astronomical growth in house prices in Sydney and Melbourne is endangering the financial stability of the economy.
“I think the banks are certainly having conversations with the regulators about, perhaps, targeting these rate hikes to areas where the risks are getting a bit beyond what the regulators are comfortable with — particularly the non-owner-occupier investor segment of the market,” Walters said.
While investors are hard-hit by the rate hikes, owner-occupiers with interest-only loans are the most likely to feel the pinch from rising rates. “If you're only paying off the interest and not paying off your principal, it does suggest perhaps you've got a loan that may be stretching your affordability a little bit,” Walters said.
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