Last month was both frustrating and confusing for many Australian
homeowners. One week the media were all but promising a rate cut; the
next we had lenders increasing the interest rates on home loans. The
question that many are asking is: why does the Reserve Bank of Australia
(RBA) make monthly decisions on ‘interest rates’ if lenders just do
their own thing anyway?We spoke to Homeloans general manager of funding and investments, Scott McWilliam, on the topic of the correlation (or lack thereof) between the RBA target cash rate and the rate the home loan borrower pays. In our discussions with Scott, we went back to the basics, as it is important to explain some of the fundamentals behind lenders’ cost of funds.
“Australian lenders have reasonably diverse funding bases, but the two major contributors are deposits and debt raised in domestic and foreign capital markets,” Scott explains.
“This debt that the financial institutions raise is at a cost that is influenced by a number of factors, one of which is, indirectly, the cash rate that is set by the RBA.
“Put simply, the cost of this debt is determined by a base rate plus a margin which generally reflects the perceived level of risk to an investor. The most commonly used base rate is the bank bill swap rate which is influenced by the cash rate, although not exclusively.”
Since the financial crisis of 2008/09, the rate to the borrower had mainly moved in line with the RBA-defined cash rate, but it seems that this trend is changing. So what is driving this change? read more...