Cash rate on hold but mortgage rates could still rise

1 minute read

Cash rate on hold but mortgage rates could still rise

by webmaster 04 August 2010 1 minute read

The official cash rate remained on hold yesterday, but in today’s mortgage market that’s no guarantee that banks and other lenders won’t increase the interest rates on home loans.

by webmaster
August 04, 2010

The Reserve Bank of Australia (RBA) left the official cash rate at 4.5 per cent yesterday, citing uncertain conditions in the international economy as one of the key reasons for the hold. The cash rate has now held stable for three months running.

While the decision to pause on rates is good news for borrowers, high funding costs could push the banks to increase their lending rates regardless.

Funding costs relate to how lenders source their funds to lend out as mortgages, and are something that borrowers – particularly those entering the market for the first time – sometimes find confusing.

While lenders’ deposit base (for example funds that consumers place with banks in savings accounts) makes up some of the money they lend out in mortgages, they also need to raise funds from other sources.


In simple terms, lenders essentially borrow money from other institutions (which can be located all over the world) and then lend it out with a margin on top to Australian borrowers.

Since the onset of the global financial crisis the cost of raising funds to lend to borrowers has become increasingly expensive for banks and lenders. As a result home loan rates have become increasingly out of touch with the official cash rate.

Dean Rushton, CEO of mortgage broking group Loan Market, says he expects the banks to increase their rates soon, although the election may delay the pain.

“Even their traditionally cheaper sources of funding, such as deposits, are now more expensive due to the intense competition for deposits in the Australian market,” he says.

“The precedent has been set and there is a likelihood the banks will have to do this again, most likely after the August 21 election.”

While nobody wants to see the interest costs of servicing a mortgage rise, it’s important for budding first time buyers to note that interest rates are now sitting at a ten year average.

Cash rate on hold but mortgage rates could still rise
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