CBA, Westpac, and ING Raise Fixed Rates For October-November 2021:

Westpac, Commonwealth Bank, and ING have signaled their belief in rising interest rates with all increases in fixed interest rates. With the current CPI of 3.8% annualized from September 2021, there is an increasing concern that the Reserve Bank of Australia’s record low cash rates of 0.5%. Any future cash rates rise from 2022 onwards from the RBA will have a potential effect on variable rate mortgages increases and less price growth in housing prices, as lenders have to pay more for their institutional lenders. While the RBA believes it will hold its record-low rates in 2024, fixed-rate mortgages rates offered by Westpac and Commonwealth Bank are a direct challenge to the plans seen. CBA Believes the rates will rise by late 2023. In this article, we will go over the overall situation of the big banks raising their fixed interest rates, what the Reserve Bank of Australia is intending with their cash rates, and what that means for Australian mortgages and your personal finance. 

Increases to Australia’s Fixed Rates Made by the Big Australian Institutional Banks:

Last week, Commonwealth Bank was the initial leader in Australia’s fixed-rate changes. Then, Westpac itself followed the lead of Commonwealth Bank through with Westpac announcing a  hike on 2-, 3-, 4- and 5-year fixed-rate home loans by 0.1% (for owner-occupiers paying principal and interest). ING even followed the increase, with them lifting their fixed rates on 2- to 5-year terms by 0.05% to 0.2%. So, what gives the coordination for hiking their longer-term fixed rates. Well, both CBA and Westpac believe that the Reserve Bank of Australia will break their initial rate rise by 2024 timeline.CBA, for example, is currently predicting the RBA will increase the official cash rate in May 2023, while Westpac is predicting a rate hike in March 2023 – both well before the RBA’s 2024 timeline. This comes as increased cash rates will increase the servicing costs for any future loans, and so institutional banks are “pricing in” a higher rate rise. Canstar’s finance expert Steve Mickenbecker explains this simply as “Lenders are scrambling to lift fixed rates before they start to feel the margin squeeze.” So, all the major institutional banks, such as Commonwealth Bank, Westpac, and ING, don’t believe the RBA’s 2024 timeline and want to price in any future cash rate rises in 2023. 

Interestingly enough though, variable home loan and 1 year fixed home loan rates have been either slashed or remained unchanged. In the case of CBA, they have cut their 1-year fixed rate by 0.1% (for owner-occupiers paying principal and interest). This is signaling institutional banks wanting to incentivize customers to variable home loan rates, that can more easily pass down the cost of future cash rate changes by the RBA. The reluctance to change their variable home loan rates signals that increased rate rises are on the horizon in 2022 and 2023. 

What the Reserve Bank of Australia thinks about the cash rate:

The current position from the October 2021 RBA’s Statement of Monetary Policy includes the following:

1. Maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances at zero percent.
2. maintain the target of 10 basis points for the April 2024 Australian Government bond
3. continue to purchase government securities at the rate of $4 billion a week until at least mid February 2022.

So, essentially they are maintaining the status quo of record low cash rates and unconventional monetary policy (quantitative easing) that was seen from 2020 to 2021. If you’re confused as to why the RBA is insisting on its 2024 timeline for any cash rate rises, it’s because they are concerned particularly about labor market slack in 2022, and 2023 may make Phillip Lowe concerned about undershooting its inflation target of 2-3%. Australia, throughout the 2010s, has had a persistent lack of wages growth, hovering around the 2% range for all Australians. They see the current headline inflation spike to 3.8% from purely supply constraints from supply chain disruptions, and see a lack of fundamentals for demand-driven inflation for rates to clearly rise. So, in the RBA’s eyes from its October 2022 monetary policy decision, there is a lack of will to raise its cash rate till 2024 as they believe that there is still labor market slack and subsequent belief of under-performance of future inflation. 

What the Australian Bank’s Fixed Rates Rise Means For Your Mortgage:

It can be tough interpreting what fixed mortgage rate rises mean for yourself, and thankfully Steve Mickenburger from Canstar has put it more eloquently. “Borrowers shouldn’t be so complacent as they must expect rises inside two years, and the closer they get to that point, the less attractive the fixed rates alternative will be.” So, the rise in interest rates means a shorter window of opportunity for borrowers to take advantage of record-low monetary policy. Limitless Loans considers the following advice for mortgage lenders:

1. Act Now for Any Fixed Mortgage Policies: As Steven Mickenburger clearly stated, there is a clear limit in terms of each of the lower fixed interest rates being offered, as banks are starting to price in future uncertainty around 2022 or 2023 cash rate rises. So, acting decisively in terms of securing a fixed rate mortgage will be crucial.
2. Consult a Mortgage Broker: If you’re in the preliminary stages of finding a mortgage for a house you are interested in, now is the time to find a trusted, certified mortgage broker. It can be extremely difficult for average consumers or mom and pop investors to scan the entire market for interest rates with the correct time frame for yourself. So, you are certainly not harming your prospects by taking advantage of new policies.
3. Take Advantage of Government Loan Policies: If you are a First Home Buyer, governments have an array of policies on offer to assist any homeowners involved with each of the processes. THis may involve lodging an application towards both federal and state first home buyer assistance packages, such as the Federal Government’s First Home Loan Deposit Scheme. We have a full article that goes into details on that aspect, which is linked here. 
4. Expect Slower Property Price Growth in 2022 and 2023: While 2021 had a surge in cashed-up buyers hungering for more space, future cash rate rises may cool down the rate of price growth in Australia. This comes as the interest costs for obtaining mortgages may dissuade individuals from investing into property, and decrease overall price competition. So, when planning to hold onto any property, a little more realism about property prices may benefit your financial health. 

If you’d like to know more about this – or any other topics raised in this article – then please get in touch today. 

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