Why did Westpac ignore the RBA and raise interest rates? And should we expect more rises? That’s the question I’ve been getting from media outlets since Wednesday’s surprise decision by the nation’s number two home lending bank.
And while I understand why lots of Aussie home loan borrowers could be getting nervous, think about borrowers in Argentina, where the central bank raised its official rate of interest to, wait for it, 60%! That’s what happens when a bunch of nincompoops run the economy and inflation is 25% and your currency drops 45% in a year against the greenback!
Let’s deal with the why, oh why Westpac did you do it? Let me list the reasons:
• Overseas borrowing costs are rising, with the bank bill swap rate (that’s an important guide for borrowing costs for banks) up 24 basis points in this quarter of 2018, compared to the first half of the year.
• Smaller banks raised rates because of these higher costs a few weeks back. This even included the likes of Macquarie and ING.
• The Royal Commission has forced banks to ask more questions before giving a loan, which has reduced the loans they make. This has hurt profits. So this rate rise decision is to help profits.
• CEO, Brian Hartzer, was under pressure, with the AFR, only seven days ago, producing the following headline: “Westpac shares slump on margin pressure”. The margin looks at the rate they can lend at, compared to what they can borrow at. The higher overseas borrowing rates of interest have added $400 million to the bank’s costs.
• Over the past couple of years, APRA slowed down lending to investors as well as Chinese borrowers, which also hurt the profits of the big banks.
• APRA also stopped the banks making ‘interest only’ loans to lots of customers, which has also slowed up moneymaking activities.
• The consequences of the Murray Financial System Inquiry forced the banks (via APRA) to hold more capital, which meant they had to hold more money to make their balance sheet look safer. But it reduced their money for lending as well as profit making.
You might have little love for the banks but they have been dragged through the mud and the ringer in recent years. This explains why the CBA’s share price has fallen from $95.80 in March 2015 to $72.15 now, which is a 24% bringing back to earth!
At the same time, Westpac has gone from $39.61 to its current share price of $28.65. That’s a 27% slugging and explains why the CEO doesn’t want another bad result next time he has to do show-and-tell for his company’s bottom line next February.
All this might be understandable but what a lot of normal people don’t understand is that we always look to the first Tuesday of the month to see what the RBA is doing with its cash rate. This acts as a guide to what happens to our home loan rate. So how can a bank move rates up without official rates of interest not moving?
The answer is that banks don’t have to follow the RBA but, historically, they have, especially when it came to rises! Generally, inflation here and in the countries we borrow from has moved in the same direction but this is a crazy time, where even Westpac’s chief economist, Bill Evans, argues that the RBA won’t raise rates until 2020!
So if the RBA is being ignored, will other banks follow suit? And will there be more rate rises ahead for home loan borrowers?
The other banks will probably raise their rates but they could wait to see how much heat Westpac cops. The CBA could wait to see if they can get some business from disgruntled Westpac customers but, eventually, their rising borrowing costs from overseas will force their hand.
In a post-Royal Commission world, I think the bank bosses would want to wait to raise rates, as they’re as popular as Tony Abbott at a Turnbull Christmas party. But eventually the fact that they do have to report their results every six months means they will jack up their rates but probably less than Westpac.
The irony of this interest rate rise is that some economists think the next cash rate move will be down, not up! This is how AMP Capital’s Shane Oliver reacted to softer investment numbers out yesterday: “More broadly, the softness seen in building approvals and business investment plans for this financial year is consistent with out view that the RBA will be on hold out to 2020 at least.
“Westpac’s decision to raise its mortgage rates with other big banks likely to follow, is also a de-facto monetary tightening and adds to the case for the RBA remaining on hold. In fact, given these developments along with falling home prices in Sydney and Melbourne, there remains a significant risk that the next move in rates is down, not up.”
This means pressure for higher rates will come from overseas and so what happens with the US central bank and not our central bank may prove more important. That said, I’m not expecting a rapid rise in local interest rates.
So what should you do to prepare yourself for possible higher rates?
1. See what you’re actually paying in interest rates and don’t just look at the headline or advertised rate. Find out the comparison rate of interest, which adds in any sneaky charges on your loan and increases the real rate you pay.
2. The Westpac standard variable rate went up 14 basis points to 5.38% but all of its related lenders — St. George, BankSA, Bank of Melbourne and RAMS — will be putting up their rates of interest as well!
3. Look for lower rates of interest. I know Switzer Home Loans are at 3.89% but there are online lenders with even lower rates.
4. If you’re worried about rising rates because you’ve over-borrowed, then look for a good three-year fixed rate but make sure the rate is not too high compared to the variable rate you might be on now. (Our 3-year fixed comparison rate is 3.98%, so use that as a benchmark in your research.)
5. Don't be afraid to look at other lenders because over the past five years, the smaller banks' market share of investment and interest-only loans has jumped from less than 20% to more than 40%!
6. Don’t be afraid to go to a couple of mortgage brokers to see if they can get you a better deal.
7. Get used to checking out what deals are around by going to interest rate comparison websites.
This negative move by Westpac for lots of their customers should be used as a positive motivation to make you think more strategically about your own management of your money.
As I always argue, if nothing changes, nothing changes. And anything worth doing is worth doing for money!