Why some lenders went above the RBA's increases
The official cash rate went up for a fifth time in September, invoking a flurry of interest rate hikes as lenders pass on the increased cost to borrowers.
But while most have matched the Reserve Bank’s 0.50% hike, interest rates on Firstmac home loan products increased by 0.60%, while AFG Home Loans increased interest rates in July, August and September, with increases ranging from 0.50% and 0.62%.
Headquartered in Brisbane, family-owned non-bank lender Firstmac has increased variable home loan rates by 0.60%, effective for new and existing customers from September 9.
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Explaining the rationale for the higher increase, Firstmac founder and CEO Kim Cannon (pictured above left) told MPA that while it was reluctant to pass on the increase, it reflected the cost of raising funds from wholesale markets.
“We run lean and we have held out longer than many other lenders but, ultimately, we cannot absorb the increased costs indefinitely,” Cannon said.
This is the first time that Firstmac has increased interest rates by more than the official cash rate, he said. In what has been the fastest tightening cycle since 1994 with whole interest rates having gone up by 225-basis points since May, the 60-basis point increase reflects the rising interest rate cycle and is underpinned by funding cost increases, he said.
“To run a sustainable business, we need to increase our variable interest rates in response to increased funding costs, although we will always hold out for as long as possible,” Cannon said.
There is an approximate three-month lag from when the official cash rate rises to when the effects of those rises are felt by mortgage borrowers, economists say.
CreditorWatch senior economist Anneke Thompson said she expected mortgage holders to feel the effects by December.
To date, all evidence suggests the majority of Firstmac borrowers can comfortably manage the rate increases, with no signs of stress, Cannon said. However, the non-bank lender understood that it was becoming more challenging for households to balance their budgets.
Those who are experiencing hardship could contact Firstmac’s dedicated hardship team to discuss their circumstances, to find ways it could assist.
Cannon urges mortgage borrowers who are facing hardship to contact their lender as soon as possible and advises them to make full financial disclosures about their situation.
“When we’re contacted by a borrower, we’re supportive towards them and we work with them to make hardship arrangements that will maximise their long-term welfare,” Cannon said.
“We suggest that borrowers continue to make some contribution where they reasonably can, in order to reduce the arrears that build up during the hardship period.”
Provided by AFG Securities and exclusive to AFG members, AFG Home Loan Retro and AFG Home Loans are part of a range of value-based home loan solutions for both prime and non-confirming borrowers.
AFG Securities general manager Damian Percy (pictured above right) said wholesale funding costs had increased by more than the official cash rate. They started their ascent ahead of the RBA monetary policy decisions, he said.
“Though all lenders rely on wholesale funding to some extent, this obviously affected non-banks disproportionately and though we absorbed those increases for some time, ultimately we needed to pass some of them on,” Percy said.
By delaying or avoiding passing on increased rates to their deposit customers, banks are able to absorb those increased wholesale funding costs more easily than non-banks, at least in the short term, he said.
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“We understand it is disappointing for our customers to receive an increase in their home loan interest rates however we believe the products are still highly competitive and the customer service provided by AFG Home Loans means our product range is always very good value,” Percy said.
“We will always strive to remain competitive and to support our customers with these changing market conditions.”
The RBA expects inflation to peak around 7.75% over 2022 and has indicated the need for further interest rate rises ahead, as it brings the official cash rate to a neutral range of around 2.5% to 3%.
Based on the current outlook, Percy said he expected a fair amount of movement across lenders and rates over the next six months.
“With the prospect of a cash rate close to 3% and mortgage rates in the 5% range, my advice to borrowers is endeavour to adjust their finances in advance, and in the event they feel they will struggle, to engage with their lender/s early,” Percy said.
Following the September official cash rate announcement, 37 lenders have now announced increases to their variable mortgage rates according to RateCity.com.au, including the big four banks.
