Interest rates rising & borrowing to get tougher - June 2021
It is now official: Interest rates are going up and borrowing money is going to get a little tougher. The jobless rate is heading below 5 percent, and the economy is in a much better shape than anticipated. We look at which specific banks are doing what in response to these economic changes and more in this month’s Black & White Finance June 2021 update.
Rates rising – more likely to be sooner
According to the Australian Bureau of Statistics, the unemployment rate has dropped from 5.48 percent in April to 5.07 percent in May, a tad above its January 2020 level. This improvement in our labour force was made up of regional workers and full time jobs, and of these full time jobs, around 60 percent were women.
Westpac’s chief economist Bill Evans on Friday 18 June wrote in a research note, “The recovery is now clearly into a self-sustaining upswing and the need for emergency stimulus policies has eased significantly.”
Other economists however believe these unemployment figures are not telling the entire story and that this result is only because of a smaller pool of workers that are competing for jobs with no migrants or non-residents in the mix given our closed borders.
Bill Evans though is confident that that this unemployment data, even though it’s not the wages that have actually increased, is strong enough to bring forward rate rises which were widely anticipated to occur in 2024 sometime. Westpac expects the Reserve Bank of Australia (RBA) will increase the current 0.1 percent cash rate by .15 percent in early 2023 now. Then by another 50 basis points later that year. “That would restore the cash rate to .75 percent by the end of 2023, in effect reversing the ‘emergency’ rate cuts in 2020 when the RBA responded to the Covid crisis,” Evan’s wrote.
Similarly, AMP’s chief economist believes the first rate hikes will come in 2023, potentially even by the end of 2022. Whereas ANZ’s economists believe it will be in the second half of 2023.
What to do with the additional stimulus now?
With conditions improving faster than expected, the RBA have some tricky decisions to make at its next meeting in July 2021. Specifically related to what they do with the additional stimulus measures implemented back in March 2020 to tackle these exceptional pandemic conditions.
The RBA’s low cash rate and quantitative easing actions have led to the lowest funding costs on record. The quantitative easing actions whereby the RBA has injected cash into the economy in exchange for bonds which they didn’t used to do, has allowed our fixed rates to be so cheap, for so long.
There’s two main technical actions here that the RBA needs to decide on. One, to keep their three-year yield target and allow it to expire in April 2024, or roll this yield target to November 2024. Two, is in what form or what do they do to the bond purchase program once the current program is completed in September. It’s what all industry pundits will be focusing on in July’s RBA statement. Simply put, these two actions will determine how much longer they will guarantee cheap funding via quantitative easing for the banks and in turn, will determine how much longer the banks can offer these cheaper fixed rates for.
We saw a while back the banks increase their 4 and 5 year fixed rates but we’ve recently seen, on June 7 2021, St George and Westpac increase their 2 and 3 year fixed rates. So there’s a good chance that the rest of the lenders in the industry will follow in anticipation of what’s to come. It seems the banks are anticipating that this additional quantitative easing support from the RBA is going to stop or pull back soon.
Tighter borrowing parameters
On Friday 18 June, Commonwealth Bank further supported this sentiment of interest rate rises, by increasing their floor rate on which it assesses home loans. Increasing from 5.1 percent to 5.25 percent.
The Australian Prudential Regulation Authority (APRA) requires banks to maintain a buffer of 2.5 percent more than their current interest rate, or the floor rate set by the bank when determining future repayment ability. This is done to make sure borrowers can afford higher repayments in the event of an increase in rates. So instead of working out whether you can afford to make repayments at 1.98 or 2.09 percent as are some of these low rates out there, the bank's assessment floor rate at say 5.25 percent is what they calculate it at. The higher this floor rate is, the lower the amount you can actually borrow so if these floor rates are going up, you’ll be able to borrow a tiny bit less in the future.
In comparison, NAB’s assessment floor rate is 4.95 percent, Macquarie’s is 5.3 percent, ANZ is 5.1 percent and Westpac’s is 5.05 percent.
Responsible lending potential changes
This change in the assessment floor rate is most likely a result of CBA responding to a few things. One, is the fact that they have had such significant increases in volumes and may potentially need to slow things down a little in light of blow outs in turnaround times. Two, their proactive & responsible change needed to adhere to the requirements outlined in a letter from the Australian Prudential Regulation Authority (APRA), as reported by the Council of Financial Regulators (CFR) on Thursday 17 June 2021, which asked the banks to pledge they are maintaining lending standards.
The CFR is made up of the RBA, APRA, the Australian Securities and Investments Commission and Treasury. The CFR also wants banks to pay attention to high levels of household debt, as well as policy options which could be tweaked to address any key risks when and if required. For example, restrictions on debt-to-income ratios and loan-to-value ratios, or tougher rules for interest-only and investor lending.
Final thoughts
The variable home loan rates are likely to stay low for much longer but it’s likely the 2 and 3 year fixed rates will increase a tiny bit in accordance with the RBA’s changes sooner. Even though the unemployment data isn’t likely to filter through to wage growth or inflation anytime soon, it’s more likely than not that we will see these two data points improve sooner than expected. We’ve already seen fixed rates go a little higher, now with the increases in the assessment floor rates and potential responses to regulators flexing their muscles, the property market will still continue to grow but not at such a fast pace.
Reach out to us today
0448 890 186
or
Feedback
We’d love to hear what you think about our content.
We’re also keen to receive your questions and if you want to know of some other great terms or rates on offer at the moment, and would rather email, please send a note to peter@blackandwhitefinance.com.au