Have you noticed how mortgage rates seem to be going up and down on any day of the month?
Not long ago, the first Tuesday of the month was the key date for Australian homeowners; that was the day that the Reserve Bank decided what would happen with interest rates.
Now your mortgage rates can go up on the same day that your mate gets a reduction. Ever wondered why?
Once upon a time, whenever the Reserve Bank set the cash rate it had a significant impact on the rates that you and I paid on our mortgages.
But now, things are not so clean-cut; the Australian Prudential Regulation Authority (APRA), the money markets and even a banks’ appetite for business at any-one-time are having a huge impact on interest rates; borrowers don’t know if they are Arthur or Martha.
APRA has set lenders growth targets under which they must stay below so what you see is them dialling up and down the rates on various loans to ensure that their lending portfolio remains balanced. So, what you may find is that they are turning up the dial on investors or they go cold on owner-occupiers.
Similarly, they could be competing aggressively for metropolitan apartments or for one particular state while they are saying no to applications in mining towns or overseas borrowers.
But the other reason that the RBA is not having as much impact is because the money that many lenders lend us has been borrowed from someone else at a specific interest rate and the banks already know what rates they have to charge to make a profit.
Banks lend to mortgage holders money that has come via a deposit from a ‘Mum and Dad’ saver here in Australia, or it may have come from an overseas financial institution; either way, the banks have to pay interest which we borrowers have to cover.
Over the next few years, we are likely to see more lenders who use this source of money come to the fore – competing against the major banks.
So what does it mean for the interest rates you pay if there is less rhyme-and-reason to mortgages?
The chances are that, if you just stay loyal to your own bank, then at some point they will increase their rates for their own business decisions while another will reduce rates to attract more business
The mortgage world is coming more complicated and non-traditional lenders are coming into the market with some sharp offers, for example Pepper now has an owner-occupied rate of 4.05 per cent – which is not far off what the traditional banks are offering.
This where good mortgage brokers kick-in; would your own bank tell you if you could get a better deal from another bank? Clearly the answer is no, but it is a mortgage brokers job to shop around for you. And, with some lenders only going through brokers, borrowers can be pleasantly surprised by what brokers recommend.