The Reserve Bank of Australia (RBA) sets the official cash rate on the first Tuesday of every month. This is the rate at which banks and lending institutions borrow money to lend to customers – much like the interest rate consumers pay when borrowing from a bank.
In order to remain financially viable, banks have a higher interest rate than the official cash rate – thus, when they are paid by customers, they make money. However, the official cash rate hasn't changed since August 2016, and yet, the Big Four have decided to increase their interest rates yet again.
The question is, why?
How can the Big Four justify an increase in interest rates?
The move to increase interest rates for customers is to increase profits. With the banking regulator (APRA) telling the banks to limit their investment lending growth to no more than 10 per cent a year, and to hold more capital as a buffer in reserve, the big banks have to hold an additional $20 billion in reserve. The knock-on effect is more capital means that more dividends need to be paid which requires more profits. So you guessed it, loan interest rates go up.
Take NAB, for example. The New Daily reports that the increase of seven basis points to 5.32 per cent amounts to $20 per month for a family with a $400,000 loan, adding to a total of $6,000 extra over 30 years.
Westpac followed suit with an increase of three basis points to also sit at 5.32 per cent – Commbank increased their rates on interest-only investment loans and ANZ refused to comment on their plans, and currently have interest rates of 5.25 per cent. Other banking organisations average just 4.48 per cent.
"When the Reserve Bank's keeping the official interest rates at record lows, I don't like the banks increasing the mortgages of every Australian," commented Opposition Leader Bill Shorten.
"The banks have made record profits and here they are again, charging mortgage holders even more."
"The banks have made record profits and here they are again, charging mortgage holders even more for the cost of their mortgages and unlike Mr Turnbull, I do have a view. Unlike Mr Turnbull, I wouldn't give the banks a massive tax cut. I would give them a Royal Commission."
The last straw
If you've been a customer of the Big Four over the last few years, you may be fed up with how they treat their customers and staff. If that's the case, it's time to make the change to a trusted banking organisation – a customer-owned bank like CAPE. CAPE has always used the standardised approach to risk, which means we are already well above the levels the major banks have been forced to move to. Plus we don't pay dividends. So for CAPE customers, we don't currently charge more for investment loans and we have no plans at this time to increase our interest rates.
This "out-of-cycle" interest rate hike is indicative of the mentality of the big banks – they work for profit, not to help customers realise their financial dreams. To learn more about how CAPE can help you do that, get in touch with our friendly team today.