Bruce's Blog

Confused by interest rate changes?

Mon, May 7th 2012, 08:59

The Story So Far:

Over the last 18 months, the Reserve Bank of Australia has first increased its Official Cash Rate by 0.25% and since then has reduced further, by 1%, a net reduction of 0.75%.

The major lenders, in contrast, have at first increased by more than the first rate rise ( remember the CBA fury?) then last week reduced by less than the official rate cut. Overall, they and all other lenders including the smaller banks, international banks, building societies and credit unions, have only reduced rates between 0.34% and 0.52%. ANZ has yet to confirm its new rate but it won’t be any different. That is, a cut of only between 45% and 70% of the Official Rate reduction over that time.

Why Haven’t the Banks Reduced Rates More?

The major banks have all blamed overseas cost of funds during the GFC and continuing since, for pressuring their lending margins. This is only part of the story.

Deliberately left unstated  has been the significant loss of revenue due to eliminating many fees. The early exit penalty (or deferred establishment fee) on most contracts written before 1st July 2011, will also disappear over the next three years.

Any negative influences such as an economic slowdown and higher unemployment, will also affect profits through debt write off provisions. The banks can clearly see these factors affecting future profitability and are acting now to offset that.

The major banks continue to report record profits.

The Opportunities

Real interest rates charged will be less than 6.5% for most lenders and most products. However, each lender does have varying lending policies and borrowing capacity constraints.

Each lender has special deals on offer from time to time. Note that most lenders treat their existing customers poorly in this regard. Offers are usually for new customers.

Real estate values are unlikely to grow at the same rate as the last 10 years, if at all, in the next 12 months. Buying property can become a more considered process at better value.

Debt reduction and saving dollars and years off existing home loans can be achieved by leaving repayments the same or even taking on a debt reduction program.

Your Finance Broker can steer you through a clear path whether you are buying or just need to review your existing finances for better results.