RBA survey: Banks to raise variable mortgage rates independent of the RBA, experts say

News highlights:

 57% of experts believe banks will raise mortgage rates by 2021 despite cash rate freeze
 All experts (40/40) expect the cash rate to hold at 0.25% in September
 88% say more banks will follow Westpac and ANZ by slashing or deferring dividends 

31 August 2020, Sydney, Australia – Banks may increase variable mortgage rates to recoup pandemic-induced losses despite a stagnant cash rate, according to experts. 

In this month’s Finder RBA Cash Rate Survey™, 40 experts and economists weighed in on future cash rate moves and other issues related to the state of the Australian economy. 

While all the experts surveyed expect a cash rate hold in September (40/40), more than half of those who weighed in (57%, 16) believe that banks will raise their variable mortgage rates despite the Reserve Bank indicating that the cash rate will remain motionless for some time.  

When asked about the expected time frame for this movement, half of the respondents (50%, 8) said banks are likely to announce out-of-cycle rate hikes during the first half of 2021. 

Graham Cooke, insights manager at Finder, said that prospective variable rate increases mean future homebuyers should tread cautiously. 

“Banking profits have nosedived off the back of billions of dollars worth of loan deferrals, a shrinking pool of first-time buyers, low-interest rates, and minimal credit growth.

“This may send banks scrambling to recoup lost funds by pushing up home loan rates to absorb some of these costs, which will come at a detriment to mortgage customers. 

“A flat cash rate does not mean homeowners are in the clear. We learned this during the most recent period of cash rate stagnation. While the rate held at 1.25% for 34 months starting in 2016, banks increased their variable rates 7 times.

“This means that homebuyers considering a variable mortgage should still factor in a potential repayment increase of 2-3% to their budget to prevent rate shock,” Cooke said. 

Further cuts to dividends expected 

Earlier in August, Westpac and ANZ announced that they are cutting or deferring dividends to shore up company profits. 

The majority of economists who weighed in (88%, 22) believe that the nation’s other big banks will soon follow suit by slashing dividends or removing them altogether. 

Cooke said that banks are taking a cautious approach as we enter a period of economic uncertainty.  

“Banks are slashing shareholder dividends in an attempt to mitigate the financial disruption caused by the virus. 

“This won’t come as welcome news for existing shareholders, but many investors will be seeing these plunging share prices as a great opportunity to buy discounted stocks,” he said.

Economic sentiment spikes

Finder’s Economic Sentiment Tracker, which gauges five key indicators – housing affordability, employment, wage growth, cost of living and household debt– shows a significant increase in overall economic sentiment since its lowest point in March 2020, rising from 8% to 24% in August

Despite the uncertainty regarding the virus, more than half (57%, 20) of respondents believe that Australia will see GDP growth in 2020. 

Leanne Pilkington of Laing+Simmons said Australia has been able to weather the economic storm of coronavirus better than other nations. 

“Relatively speaking, the economic fallout of the coronavirus that is reverberating around global markets has not impacted Australia as hard as many other nations. 

Even considering Victoria’s second wave and the potential for subsequent outbreaks elsewhere, employment figures are encouraging and other key indicators point to our economy’s overall resilience,” she said. 

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