Borrowers: Watch your lender closely
No surprise in the Reserve Bank’s decision to raise interest rates this week, but the spectre of further rate hikes to come in the next six months will surely worry many borrowers. We’ll have to wait until Monday and the RBA’s quarterly statement on monetary policy for any insight into the likelihood of higher rates in the New Year.
The latest rate rise means most borrowers’ home loan interest rate will hit 8 per cent for the first time this decade. While the standard variable rate is already above this mark and set to reach 8.57 per cent, the majority of borrowers will have either secured a discount to that rate from their bank or be with a non-bank lender offering lower rate upfront.
The true benchmark variable rate, the average of the rates that borrowers are actually paying as calculated by Infochoice, is expected to move from 7.75 per cent to right on 8 per cent. But borrowers should watch closely – during this rate rise period more than any other – for lenders passing on more than the 0.25 percentage points of the official rate rise.
Some lenders have been under pressure since the collapse of the sub-prime mortgage market in the US. The cost of funds in the wholesale finance market has risen and this has squeezed some lenders which may now be looking to use this opportunity to lift rates by a larger margin.
Credit card holders especially need to watch their bank or card provider closely. A number put up their credit card interest rate more than 0.25 per cent after the August rate rise. Those that don’t pay off their outstanding card balance in full each month should not be using one of the high-rate cards which will now go to a whopping 19 per cent and beyond. Most business borrowers will already have seen rises in rates from the sub-prime fallout and can now expect to see them rise again after the RBA hike.
The two rate increases we’ve seen, and the threat of more, will put a serious dent in the owner-occupied housing market. The last rise in August alone appears to have put paid to the recovery in home borrowing occurring in the middle of 2007.
September housing finance figures just out show a 2.4 per cent drop in the number of loan approvals, while the value of loans fell by a similar amount. The trend in both is clearly down as home affordability hits new lows.
The small rise in unemployment in October is not a cause for alarm. Overall job numbers still grew, full-time positions very strongly. Generally, the labour force is still growing and job creation is growing with it. Just one sign that more interest rate rises may be in the pipeline.