After the sub-prime mortgage crisis hit global capital markets in late-2007, causing bank funding costs to rise, the spread between the Australian banks’ discount variable mortgage rate and the Reserve Bank of Australia’s (RBA) official cash rate (OCR) increased sharply, reaching a post-GFC high of 2.7% as at January 2013 (see next chart).
Recent reductions in wholesale borrowing costs, in addition to expectations of further cuts to the OCR, prompted Australia’s second biggest home lender, Westpac, to last week slash its 3-year fixed mortgage rate to just 4.99%, which has also been matched by RAMS.
Now it appears that variable mortgage rates are also set to fall out-of-cycle with the OCR, with Sydney-based non-bank lender, BMC Mortgage Corporation, announcing that it had dropped its variable home loan rates by 10 basis points to just 5.53%. From Property Observer:
Sydney-based non-bank lender BMC Mortgage Corporation has become the first lender to cut its variable rates outside of an official RBA rate cut.
The lender dropped its variable home loan rates by 10 basis points yesterday, despite the RBA leaving the cash rate unchanged last week.
According to mortgage comparison website Ratecity.com.au, it is the first lender to cut variable home loan rates out-of-cycle with the RBA
BMC Mortgage, based in Clarence Street in the Sydney CBD, offers homeowner and investment loans at 5.53% and a construction loan at 5.75%…
Michelle Hutchison, spokesperson for RateCity, said the slow lending market is changing the way lenders compete for customers.
“We’ve never seen lenders cut variable rates while the Reserve Bank cash rate is on hold.
Lenders are obviously feeling the pressure of the slow mortgage market and are doing whatever it takes to attract new customers, including cutting their interest rates out-of-cycle.
Bank 3-year fixed mortgage rates were already at record lows in January 2013, according to the RBA, whereas discount variable rates were just 0.6% above the low of 5.10% reached in April and May 2009 (see next chart).
While competition for market share in an otherwise slowly growing mortgage market could see bank loan margins erode a little, I doubt we will see too many out-of-cycle cuts to variable mortgage rates. The fact remains that while wholesale funding costs have fallen recently, deposit funding costs remain elevated, as evident by deposit rates offered by the banks tracking at record levels relative to the OCR (see next chart).
unconventionaleconomist@hotmail.com
HnH In response to our discussion last week re interest rates for business. Just FYI
1. We pay 7.51% on our major loan which we go in and out of. We have an overdraft facility we use just around Christmas 9.08%
This is all plus facility fees
2. I spoke to a young friend who has a business…house and surrounds as security but is up to his eyeballs. He is paying 12% +fees.
Any SME that leaves any scope for getting screwed is being totally screwed.
Your young friend either has some issues that are not being divulged, or he banks with the NAB where they have a point scoring system for their approved advance clients, and that can add quite a bit to the interest and fees cost.
Tell him to call someone else, but he needs up to date financials with the 2012 FY tax lodged and either paid or provisioned for.
Most borrowing against residential security should be around 6% and commercial security around 7% assuming normal security margins – ie 80% for resi and 60% to 70% for commercial.
I borrow at the rate of 5.8% for my business via an ultra-flexible LOC facility secured by my house. One the big advantages of home ownership when running your own business.
We couldnt get a loan to start our new business, so we sold our house in 2009, with the money (quity we had) we built our business, the banks were falling over themselves to lend us money. We just recently bought 5 acres and also own our business out right.
SME is being devastated day by day, and no Oz consumer gives a rats. Now that’s fine by me, but each and every adult in Oz needs to realise that their progeny will be dependent on them for a VERY long time, or, god forbid, unemployed for a very long time or, overeducated and unable to navigate REAL LIFE ( all at the same time), or living and working overseas for a very long time.
Our SME was doing well enough 3/4 yrs ago that hubby and I got none of Julias bennnie’s so we are without a flat screen tv. However, owing to Macrobusiness, I am about 6 wks away from being free of the banks. We have had some health issues which cost the business as staff must be employed to cover absences, but ahead is blue sky, even if we have to work past age 62 !!!
I will do whatever I can to keep our kids away from debt.
Back on topic – most banks have been actively reducing fixed rates, AND they have become much more willing to reduce the discounts off their SVR. Mac bank is now offering I think 1.11% of the SVR for quality resi on good security margins, so effective borrowing rates for many people means well uinder 5.5% for variable loans.
Even the CBA will reduce to 5.4% for the right loan.
The fact remains that prices remain high and even the average half-wit Aussie now realises that interest rates wont remain low forever!
Forever – no, a long time – yes.