Home loan borrowers should brace for new year pain as BoQ raises interest rates
It is already an unhappy new year for Bank of Queensland home loan customers, who will this week be hit with an increase in interest rates set to cost the average borrower an extra $24 a month.
- Funding costs have risen for Bank of Queensland and other lenders due to international markets and term deposits
- BoQ is raising most of its variable mortgage rates by at least 11 basis points, which equals $24 a month on a $386,000 loan
- Analysts expect other banks to follow with rate rises due to cost pressures and slower lending growth
BoQ this week announced interest rate rises of between 11-18 basis points (0.11-0.18 percentage points) on most of its home loans, pushing its Economy Owner Occupier rate up from 3.88 to 3.99 per cent.
While it might have been the first bank to jump this year, the move to higher interest rates follows a wave of rate rises early last year and a trickle of further rate increases at the end of 2018.
Financial comparison website Finder said that 13 lenders in its database raised variable home loan rates over the past three months.
The key question for millions of other home owners in 2019 is whether their bank will follow suit and lift mortgage rates?
“It remains to be seen whether this is a one-off event, or whether this triggers other lenders to follow suit. In our experience, the latter is more likely,” observed Graham Cooke, Finder’s insights manager.
“With the RBA cash rate stagnant, and the costs of international borrowing increasing, many banks feel they have no choice but to increase their lending rates.”
Morgan Stanley banking analyst Andrei Stadnik said a key component of Australian bank funding costs on international markets had risen 15 basis points since October, probably slicing 2-3 basis points off Bank of Queensland’s profit margins on its loans.
Moreover, Bank of Queensland said it had recently had to pay higher interest rates to attract term deposits.
Morgan Stanley estimates that every 10 basis point increase in term deposit interest rates wipes about 4 basis points from BoQ’s net interest margin, which measures the gap between the cost of the bank borrowing money and the rates it is charging customers.
“These cost-of-funding pressures are affecting most banks, so it’s likely we’ll see other lenders follow suit in 2019,” agreed RateCity’s research director Sally Tindall.
“Meanwhile, the banks have lost potential customers as a result of the falling property market and the tightening of serviceability requirements, both of which are also putting pressure on their bottom line.”
Thus, if BoQ did not raise interest rates, these rising funding costs would erode its profits and the potential dividend for its shareholders.
However, Mr Stadnik wrote that BoQ is playing a somewhat risky game, given that its mortgage book is already shrinking in the first half of the financial year and it risks losing further market share if other banks do not match its rate increase.
RBA may cut rates again to relieve households under pressure
Ms Tindall said even the relatively modest rise, especially coming right at the end of the festive period when household budgets often tend to blow out, could put some of its customers under financial pressure.
“A lot of household budgets are feeling the pinch after Christmas. While most families will be able to absorb this hike, some may struggle to come up with the extra cash,” she added.
Household indebtedness and its negative effect on consumer spending is a key concern for most analysts looking at the Australian economic outlook.
This has prompted an increasing number to forecast the possibility of official interest rate cuts by the Reserve Bank to offset independent rate rises by the banks, ease household financial pressure and potentially prop up consumer spending.
While far from a consensus view — the overwhelming majority of Australian economists expect official rates to stay on hold this year before probably rising sometime next year — financial markets are now pricing in some possibility of a rate cut later this year, and certainly more chance of a cut than an increase in 2019.
That is something Finder’s Graham Cooke said borrowers should consider if they were tempted to fix their home loan ahead of any potential variable rate rises by their bank.
“Now may be a good time to get on the front foot and start looking for a fixed rate mortgage, but be wary — with house prices continuing to fall, a growing number of economists in our monthly forecast predict the next RBA movement may be a rate cut,” he told the ABC.