Westpac Raises Home Loan Interest Rates – Are you Getting the Best Home Loan Deal?
Yesterday’s decision by Westpac to increase home loan interest rates by 0.20% outside of the RBA rate cycle is interesting. They have indicated that the reason for the interest rate rise is due to additional costs due to regulatory capital increases imposed by APRA.
Without going into too much detail, APRA have mandated that the major banks increase the amount of capital that they hold, for each loan that they grant. The major banks have had a lower capital requirement than smaller banks and even with the current changes, the major banks carry a capital advantage compared to smaller lenders.
Interestingly, the major banks hold approx. 83% of the home loan market. Westpac has the second largest market share (about 25%) and it holds the biggest slice of the investment home loan market (about 28%). Source: APRA Monthly Banking Statistics August 2015. It has also been publicised in the news today that Westpac had the highest standard variable rate before yesterday's move.
Given Westpac’s move, it will be interesting to see whether the other banks follow. If you are a depositor, or a shareholder, the news should be positive – just look at the bounce in the share prices in the banking sector yesterday.
For a few months, we have seen interest rate rises, due to the regulatory changes. Before Westpac’s move, the increases have mainly affected investment loans, or interest only loans. These interest rate rises have sparked a number of conversations about home loan options. Our view is that home loans should be reviewed for suitability at least every two or three years, so these discussions are healthy.
Our approach is to review the borrowers current circumstances and to get an understanding of their future financial strategy. This review allows us to understand whether the current loan structure is still best suited to their circumstances and equally importantly whether the structure will help them to achieve their future financial goals.
In many cases, regardless of any interest rate savings that can be achieved (which can be significant), a restructure of the home loans can result in significant interest savings and a reduction in the loan term.
We are also frequently having discussions on whether to fix the home loan or to remain on the variable rate. There is no ‘one size fits all’ answer to this question. Once again, it depends on the borrowers personal circumstances, their outlook on official interest rates and the extent that they would be affected by any changes in the interest rates.
There is no doubt that the home loan market is becoming increasingly complex. All lenders have different approaches to interest rates, fees and loan features. In many cases, their advertised rate is higher than you would pay if you negotiate. When considering home loan suitability, it is important to compare the available options from a wide-range of lenders and determine the best loan(s) to suit your circumstances. The costs of not doing so can be (increasingly) significant.