While the official interest rate remains at a historical low, banks are likely to raise mortgage rates out of cycle yet again. Homeowners were hit by an out of cycle rate hike in November last year as banks responded to offset costs related to requirements of holding more capital as a compensating factor to home lending, for absorption of any potential losses. This year, the hike is expected regardless of what the Reserve Bank of Australia (RBA) might do with any possible measures. Homeowners are therefore projected to be carefully weighing their options, to see if there is a way they can protect themselves against the expected hikes to the extent that would be possible.
Funding cost pressures
Funding costs have been rising and the mortgage market is experiencing the pressure of strict capital requirements. RBA’s regulatory moves to curb the growth of landlord lending is also factoring into the equation. Banks are left with no other options to cushion themselves against higher funding costs other than biting the bullet and hiking the rates out of the cycle. The biggest banks so far have led the way in increasing costs affecting investors and owner-occupiers alike.
Higher variable mortgage rates
In the light of the unfolding situation in the home lending market, variable mortgage rates will definitely become less attractive. Since generally rates have been at their lowest level before the first out of cycle hike hit in November, they can only be expected to rise going forward. So there are obviously few or no chances of benefiting from the variable rates when the situation is also quite volatile. Average variable rates at the moment are higher than the average fixed rates, so experts are advising borrowers to fix part of their home loans if not all of it.
Attractive fixed mortgage rates
Within the first 3 months in 2016, fixed rates have attracted more lending opportunities. That’s what a report from the Australian Finance Group suggests. So the March Quarter recorded 17.7% increase of borrowers opting for fixed rates, compared to the 11.4% recorded in the previous quarter. The trend only indicates that borrowers want to lock in the fixed rates within their lowest levels. The risk of doing so at the moment is small considering the attractive fixed rates available from most lenders. The historical lows of these rates are expected to gradually disappear in the coming months.
Alternative lending options
With mortgage rates from regular banks expected to rise in the coming months, it makes sense to consider alternative sources of home loans. Non-bank lenders can be more flexible with their rates and fees because that is one of their main strategies for competing with regular banks.
Although this type of lenders do not provide as many products as banks, their home loans could certainly become more attractive for anyone looking to avoid the high rates expected to hit the mortgages market. Banks sell wholesale funds to non-bank lenders who in turn package them for borrowers. They effectively minimise costs and overheads to beat the rates offered by the banks.