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It seems the Reserve Bank expected the big banks to increase their lending rates by more than its 0.25 per cent cash rate rise this month, minutes of the November monetary policy meeting have revealed today.
The decision by the Commonwealth Bank to lift its lending rates by 45 basis points this month, angered consumer groups and the government and sparked nothing short of a national debate as well as a renewed focus on regulating the big banks.
The rest of the majors followed the Commonwealth Bank’s lead, albeit slowly, with NAB, ANZ and Westpac all raising their lending rates by 43, 39 and 35 basis points respectively.
But while most of Australia gasped in horror and shook their heads at the ‘greedy’ banks, it appears the Reserve Bank was not surprised.
According to the minutes of the RBA’s November meeting, there was “a possibility that banks would increase interest rates on loans by more than any move in the cash rate”.
In addition, the meeting’s minutes reveal acknowledgement by the central bank of increasing pressures on the cost of banks’ funding – something consumers and even the government have been sceptical of.
“The most recent data showed a continuation of the trends in bank funding that had been apparent for some time,” the minutes read.
“Spreads on longer term bank debt had stabilised at levels that were significantly higher than before the crisis.
“This was slowly adding to the banks’ cost of funds as banks rolled over debt issued earlier at lower spreads.”
These admissions confirm that banks’ funding costs are indeed under pressure and rising mortgage rates are set to continue for some time.
But while it might seem like the outlook for the cost of borrowing is all doom and gloom, there are still options.
While the big banks may have decided to increase their home loan rates to combat higher funding costs, many lenders haven’t.
At the end of the day, it all comes down to profit margin and just what margin, lenders are prepared to run with. And many second tier banks and non-bank lenders are seeing an opportunity to take this time to offer borrowers a better deal.
Australian First Mortgage, LJ Hooker and Yellow Brick Road are just some of the smaller lenders offering lower variable rates than the big banks.
The best home loan deals can always be found by shopping around so if you’re in the market for a home loan, make sure you cast your net wide, before committing yourself to your bank.