Watch lenders closely if RBA hikes rates

Australian borrowers should be watching their home loan lender like a hawk over the next two weeks if the Reserve Bank, as now appears highly likely, lifts official interest rates this Tuesday, February 5. This time round more than ever before, borrowers should be watching for lenders who put up their rates by more than the 0.25 percentage points of any official rise.

Already under pressure from the rise in the cost of wholesale funds from the US sub-prime mortgage collapse, lenders have in some instances lifted their variable rates 0.10 to 0.20 per cent already. But others will no doubt want to use an official rate hike to mask even bigger lifts in their interest rates, perhaps up to 0.5 per cent in all.

The warning stands for business loan and personal loan borrowers as well as credit card holders too.

The global market turmoil, threat of US recession and Prime Minister Rudd’s chest-thumping about inflation and cuts to public spending won’t be enough to avert official interest rates from going to 7 per cent.

Despite Reserve Bank data showing an easing in credit growth during December, the growth in personal and business borrowing remains strong. And we already know underlying inflation is well above the 2-3 per cent safety zone. The RBA cannot ignore inflation numbers like that, even though there is a prospect of price pressures easing this year in a slowing world economy.

A rate increase will push standard variable home loan interest rates close to 9 per cent, and the Infochoice Benchmark Variable Rate to around the 8.25 per cent mark. The IBVR is a truer indicator of the average rate borrowers are paying across the variable home loan market.

A 0.25 percentage point rise in loan rates will add around $50 a month to repayments on the average $300,000 home loan, but if the banks do more than just pass on the official rise, repayments will go up even more. It may be a good time for borrowers to re-assess the market and determine whether or not a better deal can be had elsewhere.

The costs of switching should always be factored in to any decision, especially in these days of high exit fees for those who leave their loans within the first few years (listed in contracts as ‘deferred establishment fees’).

Infochoice.com.au