Gap in home loan rates continues to widen

by Madelin Tomelty01 Dec 2016
There is a concerning gap that has emerged between the nation’s most expensive and most affordable residential mortgage rates of nearly 240 basis points, the Australian Financial Review (AFR) has reported, with many lenders blaming costly underwriting and regulatory changes for the discrepancy.

The gap between the cheapest and most expensive rates for a residential property ranges from 238 basis points for a standard variable, owner-occupier loan (from 3.35% to 5.73%) to 135 basis points for a three-year, owner-occupier fixed interest loan. The gap for owner occupied fixed rate loans spreads to 170 basis points for five-year terms. 

The result of this gap is that borrowers buying investment properties could pay 224 basis points more for the most expensive than the cheapest standard variable loan. The gap on one to five year fixed investor loans ranges from 148 basis points to 181 basis points. 

This increasing variation between affordable and expensive home loan rates is coming as a surprise to many borrowers, according to brokers and bankers, given the cash rate is at an all-time low of 1.5%, and many lenders’ advertised fixed term products sit at under 4%.

However, many economists are now predicting the Reserve Bank of Australia to raise interest rates next year, and the increasing regulatory changes and threat of market volatility may have the banks fretting over their balance sheets.

Firstmac and, U Bank, Beyond Bank, ME bank, ING, Bank of Sydney and WA-based P&N Bank have all already raised their fixed rates on certain loan products, with the banks citing “the rising cost of funds” as the cause for the hikes. More lenders are also expected to review and reassess their rates – both fixed and variable – in an effort to grow market share.

John Flavell, chief executive of Mortgage Choice, told the AFR: "It is an unprecedented shift for the jaws to open so widely in such a short time. We are seeing a definite shift in long term rates. The bottom of the market has probably passed."

The last time a gap of this magnitude in basis point terms existed in Australia was during the interest rate spike of the late 1980s. Given the official cash rate is now drastically lower, the mortgage rate discrepancies are particularly significant.

"Those that are not in a position to raise cost-effective fixed rate funding will need competitive offers in variable rates," said Stephen Mickenbecker, Canstar group executive. "Others will compete on fixed rates, rather than variable, because reduction in variable is more likely to be passed onto existing borrowers."

Lenders have increasingly been tightening their lending as they try to reduce risk and mitigate potential market volatility by increasing deposits, not lending in ‘high risk’ suburbs such as central business districts and inner suburban areas, as well as a continued clampdown on lending to foreign investors.

Martin North, principal of Digital Finance Analytics, believes that expectations of capital markets having to partly fund US tax cuts and fiscal expansion being proposed by president-elect Donald Trump are driving the increases. In the United States, mortgage rates have jumped by more than 50 basis points since the election in November. 
"This is further confirmation of a significant reversal in mortgage rates, thanks to the changed yield curve," North told the AFR.

He added that in Australia, most households are on a variable rate, so any upward movement in mortgage rates is bound to have an immediate negative impact on mortgagors.

AFG’s managing director, Brett McKeon also told the AFR that he isn’t surprised by the rate changes emerging, stating that the widening gap is a result of the underlying market changes that have been developing over the past 15 months.