On the up: What will higher interest rates mean for real estate investors in New Zealand and further afield?
The Land of the Long White Cloud is shaping up to raise rates and the country may well be a bellwether for the Australia...
Many of the nation’s top lenders have already responded to the RBA’s move to lower the official cash rate.
Today’s decision to cut the official cash rate by the RBA down by 25 basis points to 1.25 per cent has been one that has been anticipated for a long time, with the cash rate remaining at record levels for 33 rate decisions in a row.
As such, some lenders cut their rates today, and others cut theirs in anticipation of the RBA's moves late last month and early this month.
Just minutes after the decision, ANZ was the first of the big four banks to drop variable interest home loan rates by 18 basis points across investment loans, as well as home loans, and will come into effect on 14 June.
“In making this decision, we have weighed up a number of factors, such as business performance, market conditions and the impact on our customers, including our depositors,” said Mark Hand, ANZ Group executive, Australia retail & commercial.
“While we recognise some home loan customers will be disappointed, in making this decision we have needed to balance the increased cost in managing our business with our desire to provide customers with the most competitive lending and deposit rates possible.
Following ANZ was the Commonwealth Bank of Australia, announcing first on Twitter just over an hour after the rate cut announcement that all of the bank’s standard variable rate home loans will see the full cut of 25 basis points, coming into effect 25 June.
“We have carefully considered the RBA rate decision and the current funding environment, together with how we continue to meet our regulatory commitments, capital requirements and community expectations,” said Angus Sullivan, group executive retail banking services at CBA.
NAB was third out of the big four to announce their cuts and second to pass on the entire cut across its variable interest rate loans coming into effect 14 June and was announced by Mike Baird, NAB chief customer officer - consumer banking.
“Funding costs have decreased in recent months, reflecting improvements in domestic and offshore wholesale funding market conditions,” Mr Baird said.
“At the same time, the difference between what we charge and how much it costs us to fund a mortgage remains under pressure, given intense competition and increasing deposit costs.
“Decisions like this are never easy and we need to consider customer, shareholder and community expectations as well as the current economic environment to strike the right balance. Reducing our variable home loan interest rates by the full 0.25 per cent per annum is the right decision today.”
Last of the big four was Westpac, which announced a cut of 35 basis points for variable investor loans on interest-only payments, a cut of 20 basis points for variable investment property loans on principal and interest repayments, as well as a cut of 20 basis points for variable home loans for owner-occupiers on both interest-only and principal and interest repayments.
Westpac also introduced a new first home buyer special loan for owner-occupier on principal and interest on a fixed rate of 3.49 per cent per annum for five years.
The decision to make the cuts, according to David Lindberg, Westpac chief executive, consumer, was based on a number of factors.
“We are operating in a historically low interest rate environment, which creates the opportunity for home-owners to get ahead on their repayments. It is also a good time for first home buyers to get onto the property ladder with some of the lowest rates in the history of the Australian mortgage market available," Mr Lindberg said
“At the same time, we understand there are some people doing it tough despite low interest rates, as growth in both wages and our economy remains low."
Athena Home Loans also announced that they would pass on the cuts in full for all borrowers, existing and new, while Reduce Home Loans passed on the full cut for its rate slasher owner-occupier variable home loan, investor rate slasher investment variable loan and SMSF 65 per cent LVR metro variable rate, with both lenders passing on the cut immediately.
RACQ Bank will pass on the cut in full on their variable rate home loans from next week, Auswide Bank will pass the cut on in full for its owner-occupier RBA rate tracker home loan, while Greater Bank will also reduce variable rates across owner occupier loans, investment loans and business loans in full and will come into effect 11 June.
Ahead of the crowd
However, the last few weeks in the lead up to the rate cut has seen a number of lenders make out-of-cycle cuts.
The most prominent of which was NAB, which saw cuts to its choice package two-year first home buyer special, choice package two-year fixed and tailored home loan two-year fixed products by 20 basis points.
Commenting on the movement, RateCity’s Sally Tindall said that, at the time, this was a sign that the big banks were looking to appeal to newer customers.
“These low fixed rates could really appeal to some home owners, but as we edge closer to RBA-day, some people could wait and see how the variable rates play out,” she said at the time.
Prior to this, ING, Greater Bank and BOQ also announced a cut to their rates.
ING announced their cuts on 29 May, cutting all owner-occupier rates by 17 basis points.
Greater Bank and Bank of Queensland followed a day later, with Greater Bank cutting its owner-occupier one-year fixed home loan on principal and interest by 50 basis points, as well as making cuts to two-year fixed rate down to 3.39 per cent, and then both the four-year and five-year fixed rates down to 3.64 per cent.
Meanwhile, BOQ cut its owner-occupier two-year fixed home loan rate to 3.44 per cent and three-year fixed home loan rate to 3.39 per cent.
Expert takes on the rate cut
The Real Estate Institute of Australia and its president Adrian Kelly welcomed the decision, claiming it will assist in bringing affordability and stabilisation into the property market.
“Subject to the banks passing on the full cut, this means that for each $100,000 borrowed, annual payments decrease by $250. For a first home buyer, who in the March quarter of 2019 had an average loan size of $338,000, this means a saving of $70 per month,” Mr Kelly said.
“Unlike the last series of cuts in 2015 and 2016, which stimulated the housing market through increased investor activity, this cut will stabilise the market, which is already showing signs that the rate of price falls is declining rapidly.
“It is first home buyers that will benefit most, with the number of first home buyers decreasing nationally to 23,403 in the March quarter 2019, down 19.7 per cent for the quarter and a decrease of 11.6 per cent compared to the corresponding quarter in 2018.”
Mortgage Choice CEO Susan Mitchell said that the focus must now be placed on when lenders will pass on the rate cut to borrowers.
“If recent history is anything to go by, the last time the RBA cut the official cash rate, few lenders actually passed on the full rate adjustment to borrowers; however, lenders would be aware of the intense public backlash they would receive if they did not deliver some relief to borrowers,” she said.
“Financial markets are speculating that a second rate cut is on the cards in 2019, and some economists predict as many as three rate cuts by Christmas. Regardless of what the RBA has in store, I urge anyone looking to secure a home loan to speak to their local mortgage broker to ensure they are getting a good deal.
“Interest rates are already hovering at historic lows, and if lenders respond to the RBA’s move by slashing their interest rates, there is an even more compelling case for those with property buying plans to take action.”
Ms Mitchell added that the RBA would see further cuts to the cash rate as being able to boost activity in the property market.
“While I do not see dwelling values rebounding to their 2017 peak any time soon, monetary policy stimulus could help put a floor under falling dwelling values,” she said.
The Housing Industry Association’s chief economist, Tim Reardon, said that the decision to cut rates, along with current property taxation policies remaining, will contribute positively to the housing markets, but it is now up to the major banks to pass on the rate cut in full to borrowers.
“APRA’s regulatory restrictions and increasingly conservative lending practices by banks are the cause of the credit squeeze,” Mr Reardon said.
“The impact of these restrictions are now being seen in the wider economy. Households have clearly tightened their belts in light of falling house prices, which have been exacerbated by the tight credit limits.
“If banks do not pass on the full rate cut, they will have magnified the impact of APRA’s rule changes and stifled the ability of the RBA to use monetary policy to rectify the damage caused by the credit squeeze.”
Interest is the amount of money charged by a lender or financial institution for a loan, which is calculated as the percentage of the principal amount paid over the loan term.