No relief from interest rate pain
By Karina Barrymore July 07, 2008 08:30am
BORROWERS should brace for more interest rate rises despite the Reserve Bank of Australia indicating rates are on hold.
Since late last year individual lenders have pushed up their interest rates on top of the “official” increases by the Reserve and there seems no sign of this letting up.
St George Bank put its mortgage rates up again on Friday and there is likely to be more to come, regardless of the Reserve Bank’s decisions.
This is because the finance and banking industry ultimately has the last say on interest rates.
Although the Reserve Bank sets an official rate, it is up to each lender to decide what it will charge.
And despite the Reserve Bank indicating last week it thinks consumer demand is coming under control, the banks and lenders have other issues to factor in which could still see rates go up again.
As with any business or service, the biggest influence on how much a customer gets charged is usually market forces.
Supply and demand for money, or credit, dictates the rate a lender will charge its customers.
If lots of people want to borrow money and there is a shortage, lenders can push up the interest rate they charge. If nobody wants to borrow money, lenders can lower the rate.
At the moment there is still a global credit shortage and that is why some Australian lenders are warning people to prepare for more rate rises.
So far this year the major banks have topped up the official Reserve Bank interest rate rises by up to an extra 0.4 per cent on mortgages.
Second tier and non-major banks, however, have also been actively pushing up their rates, in some cases by even more.
However, the situation is worse for people with money owed on credit cards and commercial loans which have seen interest rate increases outpace even the unofficial rate rises.
“Without a doubt commercial loans have gone up substantially, in fact much more than personal lending,” Infochoice head of research Steven Anderson said.
“Small business lending has gone up a lot further, I’d say for every 25 basis points for personal lending, small business loans have gone up 40 points,” Mr Anderson said.
And although the RBA thinks the economy may be stabilising, there are other factors that are influencing the lenders to raise rates again.
“The RBA increases don’t reflect the current market conditions for lenders,” Mr Anderson said.
“The cost of money has just gone too high and profit margins aren’t there. Compared with last year the cost of money has just gone through the roof.
“These costs have to be passed on to customers,” he said.
The main cost issue at the moment is the 90 day cash rate. Ever since the credit crisis started to hit Australia back in September 2007, this cost component has been much higher.
St George group executive of retail banking Les Matheson said on Friday that even with its latest rate hike, the bank was still not “fully recovering” all its higher funding costs.
Australian deposits only account for just over half the amount of money needed to meet borrowing demand. That means the other half has to be sourced from overseas.
The flow-on effects from the world wide credit shortage are expected to take another 12 to 24 months to work through the financial system and get back to normal.
So the higher cost of money could be here for a while but that’s not necessarily bad news for everyone.
For people with money on deposit in Australia the current situation has provided a windfall, with deposit rates rocketing up this year.
In many cases investors can earn higher returns for having their money in the bank on short term deposits than they can from the share market, property or even in their superannuation fund.
Deposit rates have jumped up to 8 per cent and that’s without having to lock your money in for long periods.
(Source: news.com.au, 10/07/2008)
Tags: Property Market News