Interest rates are rising. In the past few weeks, ANZ, Commonwealth Bank and Westpac have hiked their rates. So have ING, Suncorp Bank and Adelaide Bank.
Your buyers might find this hard to accept, given that the last time the Reserve Bank increased the official cash rate was in November 2018 – almost eight years ago.
If your buyers ask you why rates are rising, you can explain that lenders are responding to two strong forces:
- Rising funding costs
- Falling profit margins
Banks are responding to market forces
Why have funding costs been rising? Partly it’s because we’ve been putting less money into savings accounts and term deposits. As our saving rate has fallen, so has the amount of mortgage funding that banks have been able to source locally. That in turn has forced them to source more from overseas. Unfortunately, though, the cost of this overseas funding has been going up, due to rising US interest rates and the falling Australian dollar.
Why have profit margins been falling? There are two main reasons. First, regulators have forced the big banks to retain more capital as a risk-management measure. Lending is how banks generate profits – but less of their money has been out there earning a return. Second, there has been fierce competition in the mortgage market during the past few years, which has driven down rates.
Ironically, then, lenders have started increasing interest rates to claw back some of the profits they lost from reducing them.
Agents should be prepared
As we all know, there’s generally a correlation between interest rates and open home traffic. When rates go one way, traffic tends to go the other.
So this trend of rising interest rates should concern all agents, especially those in depressed markets like Sydney, Melbourne, Perth and Darwin.
The one piece of good news is that many lenders are still fighting hard for new business (even as they’re pushing up rates for existing customers). For example, Commonwealth Bank is offering Extra Home Loan borrowers a discount of 0.76 percentage points for the first two years, bringing the variable rate down to 3.69 per cent (comparison rate 4.24 per cent). Westpac is offering Premier Advantage Package borrowers up to 500,000 Velocity frequent flyer points. Other lenders have their own incentives.
That said, interest rates have been so low for so long, it seems the only way is up. Agents should be prepared.