Interest Rates were set by the RBA
Traditionally the Reserve Bank of Australia (RBA). would set interest rates in Australia. The RBA would adjust the cash rate. The cash rate is effectively the rate our banks borrow money at from the RBA.
Like any business as the cash rate goes up and down so would the cost of borrowing money. Ultimately this would flow through to your home loan. When the RBA meets on the first Tuesday of the month they would announce the cash rate changes.
Banks would pass on all or part of the change to you the consumer. However, in the past few years we banks are making out of cycle rate changes. This means they adjust their home loan rates independently to the RBA. The bank rationale is “their cost of funds” has changed. But the RBA has not adjusted the cash rate for a long time.
So how do the banks justify this behaviour?
Banks are now borrowing more and more money from overseas. This means as the exchange rate changes and the cost of funds changes so does your home loan interest rate. While this is true funding costs go up and down but recently all we see is banks passing on rate rises. We rarely see banks announcing we have reductions for all borrowers independent of the Reserve Bank.
Your mortgage broker can help
Mortgage broker What If We Finance advises that smaller lenders who borrow more money overseas recently have moved quickly to increase their rates. Infact one lender has just announced 2 out of cycle rate changes. This behaviour by banks means despite the RBA not adjusting rates they can increase their home loan rates.
As a consumer you need to be more vigilant as banks have a tendency to increase rates for existing customers and offer discounts to new borrowing or customers. Consequently you should be working with your mortgage broker every 1 -2 years to review your home loan to ensure you are getting the best possible rate.
What If We Finance has seen customers over 2 years who have had rate rises applied based on changes in bank policy or rates that have impacted customers to the tune of $5,000 per year.
For example holiday homes by some lenders are treated as investment properties. Banks now penalise investment borrowing with a higher interest rate so in this instance you rate could be 1% pa higher and assuming a loan of $500,000 it is easy to see how you can pay a lot more money than you need to.
Everyone’s circumstances are different but given banks out of cycle interest rates rises it makes sense to have regular contact with your mortgage broker to ensure you are getting the best possible deal.