Interest Rates Are Rising In August
The Reserve Bank of Australia (RBA) today decided to increase the official cash rate by 0.50% to 1.85%.
The increase follows a slightly better than expected annual inflation figure of 6.1 per cent in the June quarter and falling house prices in some eastern state cities.
Balancing out these factors is an unemployment rate of 3.5%, the lowest rate in almost 50 years.
The RBA faces a challenging period as it weighs up trying to rein in inflation against the spiralling cost of living. There are mixed factors at play, including household expenditure and overseas factors.
The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” RBA Government Philip Lowe said in his monthly statement.
That assessment is definitely more a matter of art than science, and the RBA has had a chequered history when forecasting interest rates.
Lowe acknowledges the path to achieving the balance between getting inflation down and keeping the economy on an even keel is “clouded in uncertainty” – not least because of global developments.
Adding to the complexity is lenders can set interest rates independently of RBA movements, and their responses to this official cash rate hike may vary.
Banks Are Making Billions Each Year
Banks are making billions each year as a result of the “loyalty tax” as the Reserve Bank of Australia’s (RBA) larger than normal interest rate increases are passed on to existing customers.
The RBA has increased interest rates from a record low of 0.1 per cent to 1.85 per cent since May.
The banks are offering lower interest rates to attract new customers; the experience of independent mortgage broker What If We Finance showed that while interest rate rises smash current homeowners, they could make huge savings by switching home loan providers.
What If We Finance recently saw a client offer a rate of 3.74% as an existing customer, but a new customer receives 3.14%. When pressed, the lender openly admitted to What If We Finance, we have different pricing for new business and existing customers.
The bank even had detailed sales scripting to justify the decision and their lack of loyalty to existing customers.
The behaviour can be very profitable to banks. For a $650,000 home loan, this equates to $117,000 in extra interest over the life of a 30-year loan. For every 1,000 customers, this equates to an extra $117 million in income. As you can see, this can be a very profitable business.
What If We Finance works with multiple lenders daily, so we know just how flexible they can be to keep or win your business?
It never hurts to ask the question, so get in touch to review your options.