Banks unlikely to match RBI’s rate cut any time soon

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Mumbai: Indian bankers say piles of bad debt and the high cost of deposits mean they are unlikely to reduce interest rates on loans by as much as the central bank cut its key lending rate in a bid to spur growth.

The reluctance of bankers to pass on all of Thursday`s surprising 25 basis point rate cut is a potential blow to Prime Minister Narendra Modi`s government, which hopes lower lending rates will lift growth and job creation ahead of general elections due by May.

Making more credit available more cheaply is vital for Modi, who wants to please businesses, farmers and individual borrowers.

Four senior public and private sector bankers told Reuters on Friday that they might only cut lending rates by 5-10 basis points. A move of that size would have a negligible impact in boosting credit, or in reducing refinancing costs.

“If there is a lot of (government) pressure, then I may cut by a notional 5-10 basis points,” said the head of a big state-run bank who asked for anonymity due to sensitivity of the subject.

“That may have a psychological impact on corporates but will not really help in boosting credit growth or lowering borrowing costs.”

For Modi and new Reserve Bank of India Governor Shaktikanta Das, who is keen to boost private investments by lowering rates, this poses a problem.

Economic growth has slowed, with private investments slumping and consumption gains muted. Annual industrial output growth in November rose 4.1 percent, down from October`s 8.4 percent.

For the banks – often stuck with bad loans and heavy provisioning – any cut in loan rates is unlikely without a corresponding fall in deposit rates, which will require cash conditions to improve significantly, say bankers.

And banks are reluctant to cut deposit rates in the fiscal year`s last quarter, as they are keen to shore up their books while not losing hefty deposits.

Indian banks price their benchmark loan rates, known as the marginal cost of funds based lending rate (MCLR), mainly based on the cost of deposits.

“MCLR might not come down significantly very soon as any meaningful change will depend on cost of funds,” said Parthasarathi Mukherjee, managing director and chief executive officer of private lender Lakshmi Vilas Bank.

Unless banking system liquidity rises, he said, “we are not seeing any substantial fall in lending rates across the board any time soon.”

NAB and other banks cut mortgage rates

National Australia Bank (NAB) last week cut fixed and variable mortgage interest rates on selected home loans. Other banks that also shifted their rates last week included AMP, Teachers Mutual Bank and Adelaide Bank.

NAB’s Base Variable Home Loan Special saw its interest rate reduced by 20 basis points to 3.79% p.a. (comparison rate 3.83% p.a.) for new owner occupiers with LVRs at 80% making principal and interest repayments.

At the same time, NAB reduced the interest rates on several fixed rate home loans for owner occupiers and investors by between 4 and 34 basis points.

The following interest rate changes were also seen last week:

  • AMP increased variable interest rates by 15 basis points for owner occupiers and investors paying new and existing principal and interest and interest only loans.
  • AMP also decreased fixed rates on selected Professional Package home loans by as much as 87 basis points, and on the Basic Fixed Rate Investment Loan (Principal & Interest) 3 Years by 88 basis points.
  • Teachers Mutual Bank cut rates on its 3, 4 and 5 Year Fixed Rate Home Loans for owner occupiers and investors by between 10 and 50 basis points.
  • Adelaide Bank cut fixed and variable interest rates on many of its home loans for owner occupiers and investors, with the cuts ranging from 5 to 92 basis points.

ME Bank cuts mortgage rates

ME Bank has reduced its home loan interest rates by up to 50 basis points, which could lower the cost of a typical mortgage by $42,000.

ME Bank has made changes to its:

  • 1-year fixed rates
  • 2-year fixed rates
  • 3-year fixed rates
  • 4-year fixed rates
  • 5-year fixed rates

Most of the interest rate cuts apply to owner-occupiers, although there are also some cuts for investors (see table below).

The Member Package five-year fixed rate has fallen from 4.49 per cent to 3.99 per cent (comparison rate 4.37 per cent).

If that rate cut was applied to a 30-year, $400,000 mortgage, the total repayments over the life of the loan would fall from $728,771 to $686,648, resulting in a saving of $42,123.

Product Loan type Old advertised rate New advertised rate New comparison rate Change to advertised rate
Flexible Home Loan fixed 1 year (LVR < 80%) Owner-occupied 4.14% 3.99% 5.02% -15 points
Flexible Home Loan fixed 2 years (LVR < 80%) Owner-occupied 3.99% 3.89% 4.90% -10 points
Flexible Home Loan fixed 3 years (LVR < 80%) Owner-occupied 4.14% 3.94% 4.82% -20 points
Flexible Home Loan fixed 4 years (LVR < 80%) Owner-occupied 4.44% 4.14% 4.80% -30 points
Flexible Home Loan fixed 5 years (LVR < 80%) Owner-occupied 4.64% 4.14% 4.73% -50 points
Flexible Investment Loan fixed 4 years (principal & interest) Investment 4.74% 4.54% 5.42% -20 points
Member Package Flexible Home Loan fixed 1 year (principal & interest) (LVR < 80%) Owner-occupied 3.99% 3.84% 4.34% -15 points
Member Package Flexible Home Loan fixed 2 years (principal & interest) (LVR < 80%) Owner-occupied 3.84% 3.74% 4.31% -10 points
Member Package Flexible Home Loan fixed 3 years (principal & interest) (LVR < 80%) Owner-occupied 3.99% 3.79% 4.31% -20 points
Member Package Flexible Home Loan fixed 4 years (principal & interest) (LVR < 80%) Owner-occupied 4.29% 3.99% 4.37% -30 points
Member Package Flexible Home Loan fixed 5 years (principal & interest) (LVR < 80%) Owner-occupied 4.49% 3.99% 4.37% -50 points
Member Package Flexible Investment Loan fixed 4 years (principal & interest) Investment 4.59% 4.39% 4.73% -20 points

ME Bank interest rates are lower than average

ME Bank’s home loan rate cuts mean that its fixed-rate mortgages now have significantly lower interest rates than the industry average.

Here’s how ME Bank compares to the average interest rate of all the different fixed-rate home loans listed on RateCity:

Loan Loan type RateCity average ME Bank Difference
1-year fixed Owner-occupied 4.18% 3.84% 34 points
2-year fixed Owner-occupied 4.14% 3.74% 40 points
3-year fixed Owner-occupied 4.22% 3.79% 43 points
4-year fixed Owner-occupied 4.55% 3.99% 56 points
4-year fixed Investment 4.81% 4.39% 42 points
5-year fixed Owner-occupied 4.60% 3.99% 61 points

ME Bank’s interest rate changes took effect on March 29.

Lenders offering 3-year mortgages from as low as 3.69%

Australia’s big four banks and a host of challenger lenders are offering three-year fixed-rate home loans for under 4 per cent.

The three-year home loans with the lowest interest rates are for owner-occupiers with a maximum loan-to-value ratio (LVR) of 80 per cent.

Both Westpac and Commonwealth Bank have three-year mortgages with advertised rates starting from 3.89 per cent (see table below).

NAB and ANZ have three-year interest rates as low as 3.99 per cent.

Three-year fixed-rate home loans – big four banks

Lender Advertised rate Comparison rate
Westpac 3.89% 4.92%
Commonwealth Bank 3.89% 5.01%
NAB 3.99% 4.86%
ANZ 3.99% 5.02%

Owner-occupiers with a maximum LVR of 80 per cent could potentially get even lower interest rates from a range of challenger lenders.

For example, both Easy Street Financial Services and Community First Credit Union are pricing their three-year fixed-rate home loans as low as 3.69 per cent (see table below).

UBank and IMB Bank have three-year mortgages from 3.74 per cent, QBank from 3.75 per cent, Auswide Bank from 3.76 per cent, and Reduce Home Loans, Freedom Lend, RACQ Bank and Suncorp Bank from 3.79 per cent.

Three-year fixed-rate home loans – challenger lenders

Lender Advertised rate Comparison rate
Easy Street Financial Services 3.69% 4.13%
Community First Credit Union 3.69% 4.93%
UBank 3.74% 4.01%
IMB Bank 3.74% 4.49%
QBank 3.75% 4.36%
Auswide Bank 3.76% 4.59%
Reduce Home Loans 3.79% 4.08%
Freedom Lend 3.79% 4.48%
RACQ Bank 3.79% 4.75%
Suncorp Bank 3.79% 4.78%

Please note that the cheapest three-year home loan won’t necessarily be the best home loan for your situation.

Housing finance falls to lowest level since Jan 2016

Today’s housing finance figures are further evidence of the continued slide in Australia’s housing market.

The ABS housing finance figures for August, released today, show an overall drop of 2.1 per cent from the previous month. It is the lowest recorded figure since January 2016 in seasonally adjusted terms.

Owner-occupier lending fell to its lowest level since April 2017, while investor lending fell for the sixth month in a row, to the lowest level since August 2013.

Year-on-year (August 2017 to August 2018), all categories have experienced falls:

  • All finance down 10.1 per cent.
  • Owner-occupier finance down 3.9 per cent.
  • Investor finance down 20.5 per cent.

RateCity research director Sally Tindall said the downturn was likely to continue for many months.

“The banks have put the brakes on loose lending practices and that’s having a marked effect on both the housing finance market and the property market,” she said.

“Today’s figures show year-on-year drops as high as 20 per cent for investors. That’s a significant slow-down, with no clear end in sight.

“The continued fall in housing finance will be hurting the banks’ loan books and their profitability.

“What’s important to remember is that banks are still in the business of writing loans and hungrier than ever for new business.

“Banks are falling over themselves to get ‘ideal’ borrowers on to their books at the moment. The continued drop in housing finance should only spur them on even more.

“If you’re an owner occupier and own over 20 per cent of your home then you’re in the driver’s seat when it comes to rates,” she said.

IMB raises rates for home loan customers

IMB Bank, one of Australia’s leading mutual banks, have increased its standard variable interest rate by 15 basis points for new and existing home loan customers.

The rate changes came into effect as of 5 October, with the Standard Variable Home Loan rate moving to 5.42 per cent.

In a statement released last Friday, the rate increases have been linked to recent moves made by big four banks.

“Despite home loan interest rates being at historically low levels, many financial institutions have raised their home loan interest rates in recent weeks.

Like other banks, we use customers’ deposits and other sources of funding to lend to our borrowers and we pay interest to attract and use these deposits.

Over recent months, the cost of this money has increased and as a result we are having to pass on some of this increased cost.

Although this decision was difficult, we need to move our lending rates in order to continue to balance the needs of our borrower and depositor members and maintain investment in new banking technologies, products and our communities.” – IMB Bank

Would you delay retirement to help your kids get their first home loan?

Many Australian parents are putting off hanging up their work hats for a few more years so they can help their children become first homebuyers.

New research from homeloans.com.au has found that almost two in three parents (65%) are making financial and personal sacrifices to help their children or grandchildren with home ownership plans, now or in the future. More than one in four (29%) of these parents are prepared to retire later than planned in order to provide financial assistance.

Homeloans.com.au head of marketing, Will Keall, said that the 2018 Generational Property Ladder Survey highlights just how far parents will go to help secure their children’s future:

“Due to tougher mortgage lending standards it’s increasingly difficult for younger generations to break into the property market. To help with this, parents are doing what they can to help their children become first homebuyers, from cutting back on their own spending to going guarantor on a loan.”

Breaking down the figures

Of the 1072 parents and grandparents surveyed in July 2018:

  • 39% are willing to live more simply by sacrificing small luxuries like going to restaurants or movies
  • 33% are willing to delay big expenses like holidays or a new car
  • 30% are willing to dip into their hard-earned savings to provide financial assistance
  • 26% of parents that are currently providing assistance have dipped into savings to do so
  • 10% are willing to refinance their own mortgage to free up cash
  • 49% have given cash gifts to help their children or grandchildren buy a home
  • 60% of respondents looking to provide a boost would consider a cash gift
  • 16% have provided an interest free loan
  • 35% of respondents looking to provide a boost would consider an interest free loan
  • 46% would let their children or grandchildren move into the family home while saving for a deposit
  • 36% are willing to be a guarantor on a loan from a financial institution
  • 32% are willing to purchase a home in partnership with their children or grandchildren
  • 13% have set up a trust fund for their children

Investor mortgage demand falls as housing returns decline

Investment mortgages may be becoming less popular, with a new report from CoreLogic showing a rapid reduction in overall returns from Australian housing over the past 12 months.

According to the CoreLogic Total Returns Index, Australia’s housing market over the past year has been hit by a double-whammy of falling dwelling values and gross rental yields that are close to historic lows, resulting in total annual returns falling from 14.2% in July 2017 down to just 1.9% in July 2018 – the lowest figure since June 2012.

The fastest falls were recorded in Australia’s capital cities, with the total returns for the combined capitals falling from 14.8% in July 2017 down to just 0.8% – the lowest result since May 2012. While the combined regional housing markets also experienced decline in total returns, their fall was much shallower, dropping from 12.0% to 6.6% over the past 12 months.

The state with the nation’s highest total returns was Tasmania, with Hobart experiencing returns of 17.1%, though even this was down from the 19.7% recorded a year ago, as well as the recent peak of 20.2% in September 2017. Regional Tasmania saw return of 12.0%, down from the recent peak of 14.1% a year ago.

CoreLogic research principal, Cameron Kusher, said that this recent data shows a significant fall in demand for investor mortgages, especially in Sydney and Melbourne, which experienced some of the most significant slowdowns in total returns over the past year (-2.5% and +2.4% respectively):

“Given the decline in returns and an expectation that returns will continue to shrink as values decline further, it is anticipated that investor mortgage demand will also shrink, particularly in Sydney and Melbourne. Investors could see renewed interest for housing in other regions of the country where total returns remain positive however, the returns are anticipated to be far inferior to those recorded over recent years in Sydney and Melbourne.”

Home loan specials, the real cost of rewards

More than a dozen lenders are spruiking cash back deals, rewards points and even free electricity in a bid to attract new home loan customers. But RateCity has warned that these deals could leave borrowers up to $85,000 out of pocket. 

The Commonwealth Bank is the latest lender to launch a special offer with some of its home loans, kicking off a $2000 cash back deal from this week.

CBA joins the ranks with Westpac – including St. George, Bank of Melbourne and BankSA – as well as Bank of Sydney, Homestar Finance, Northern Inland Credit Union, P&N Bank, Police Bank, Reduce Home Loans, UBank and Virgin Money.

Sally Tindall, spokesperson for RateCity.com.au, urged borrowers to look beyond these incentives and crunch the numbers over 30 years.

“Don’t go choosing something as important as a home loan based on a short-term perk,” she said.

“Free overseas flights or a lump sum of cash might grab your interest, but most home loans have a 30-year term, by which time the holiday will be a distant memory.

“There are lots of specials on the table at the moment because the banks are eager for your business. Growth in home loans is slowing and that’s got the banks’ marketing departments working overdrive.

“If you’re looking for a home loan, first make sure it is a fit for your finances. Then look for a loan with a low rate and low fees. Any cash or points offered beyond that are a bonus, she said.

Current home loan specials and the extra you shell out to get them

Provider Product Perk Rate Extra cost*
Bank of Melbourne Advantage Package $1500 cashback 4.45% $67,941
Bank of Sydney Expect More package Package fee waived for life of loan 3.58% $3,378
BankSA Advantage package $1500 cashback 4.41% $65,384
Homestar Finance Owner occupied loan $900 cashback 3.54% $690
Northern Inland CU Introductory home loan Up to $1000 cashback 3.69% $12,799
P&N Bank & home loan $1000 cashback 3.99% $27,560
Police Bank Premium home loan $1000 cashback 4.74% $75,848
St George Advantage package $1500 cashback 4.42% $66,023
Ubank Discounted rate loan $1,000 cashback 3.69% $9,069
Virgin Money Reward Me variable loan Max 630,000 Velocity Rewards points over life of loan 3.68% $7,039
Westpac Premier Advantage package 200,000 Velocity Rewards points 4.44% $66,842
CBA Wealth Package Variable $2000 cash back 4.72% $85,051

* This is the extra cost compared to the lowest-rate home loan over 30 years.

Notes: Based on an owner occupier loan of $300,000, paying principal and interest. The costs of each loan have been compared to the lowest rate comparable loan on the market, Reduce Home Loan High Lend loan. All loans are comparable in that they have a 100% offset account and unlimited extra repayments with the exception of Ubank. Value of frequent flier points has been calculated on Syd-Melb return flights, 6 months out, opting for the lowest points. Total costs do not include discharge fees.

Bendigo Bank joins the out-of-cycle rates party

Australia’s seventh largest lender Bendigo Bank has become the latest home loan provider to hike rates out of cycle by up to 16 basis points.

They join an ever-growing list of Australian lenders who have increased rates including AMP, Macquarie Bank, ING, Bank of Queensland, Suncorp and Citi blaming the cost of funding (see list of hikes below).

RateCity spokesperson Sally Tindall all eyes are now on the big four banks, who have kept a lid on rates so far.

“With the bank bill swap rate continuing to spike, our big banks have a decision to make.  Hike and protect their profit margins, or wear the cost and keep their customers onside.

“The big bank who goes first will cop the most negative publicity. It’s a matter of seeing who blinks first.

“The message for Australian mortgage holders is now clear. Be prepared to shell out extra for your home loan in coming weeks.

“The rate hikes have been moderate but even $20 or $30 extra a month will be a stretch for anyone who’s already feeling the pinch,” said Ms Tindall.

Main players left to hike

Commonwealth Bank

Westpac

NAB

ANZ

Bankwest

St George

Bank of Melbourne

BankSA

Bendigo Bank rate hikes  

  • Owner occupier principal and interest loans will increase by 0.10%;
  • Owner occupier interest only loans will increase by 0.16%;
  • Investment loans will increase by 0.10%;
  • Lines of credit will increase by 0.10%.

Out-of-cycle rate hikes

Lender Rate hikes Effective date
AMP Bank up to 0.57% from 13-Jul
Auswide Bank up to 0.13% 27-Jun
Bendigo Bank up to 0.16% 23-Jul
Beyond Bank 0.06% 13-Jul
BOQ up to 0.15% 2-Jul
Citi 0.10% 8-Jun
Heritage Bank 0.05% 2-Jul
Homeloans 0.15% May – Jul
IMB Bank 0.08% 22-Jun
ING 0.10% 3-Jul
Loans.com.au up to 0.10% 6-Jun
Macquarie Bank up to 0.10% from 13-Jul
ME Bank up to 0.16% 19-Apr
MyState up to 0.09% 28-May
Pepper up to 0.55% 6-Jul
Qbank up to 0.16% May-23
State Custodians up to 0.10% 18-Apr
Suncorp up to 0.12% 28-Mar