Joanna Pretty – General Manager, State Custodians Home Loans
Hi everyone, I’m Joanna Pretty and I’m the General Manager of State Custodians. The team and I decided it was time to talk to you about variable interest rates. While it’s a very dry topic we believe information is power and we’d like to talk to you about why interest rates change.
Joanna Pretty – General Manager, State Custodians Home Loans
The team and I get a lot of questions from customers about interest rates and why they move. One of the major things we have to consider is the fact that the interest rates are not always tied to the RBA cash rate. In the media you’ll hear about the RBA cash rate moving or staying the same and yet interest rates in the organisations that you’re with will often change and there are reasons for that.
As an organisation the way we get our funding is to package up similar types of loans into bonds and those bonds are then sold on the open market to investors. Investors expect a return on the bonds and that’s called the bond yield, and we have an obligation to meet that yield. The Bank Bill Swap Rate is a leading factor for the cost of funds for us in relation to those bonds. We have to keep our eye on the Bank Bill Swap Rate, the movement of the Bank Bill Swap Rate is the thing that influences our cost of funds. If the Bank Bill Swap Rate increases then that means our cost of funds increase and that means that in some instances we can be running a loss on some of the loans that we have. While we don’t like passing on these increases to you sometimes we have no choice and we have to do that. It’s riveting stuff isn’t it.
Information is power so while, as I said before, this is not the most riveting topic, we believe that you need to understand why we make the decisions that we do. At State Custodians we want to make sure that you have the most competitive interest rates, but it’s also very important to us that you understand why we make the decisions that we do. As I said before, we keep our eye on the Bank Bill Swap Rate. And while it does have a relationship to the RBA cash rate, the swap rate operates independently; it’s motivated by international market forces and it can often be a leading indicator of what’s going to happen with the cash rate, but it does mean that sometimes the pricing does change based on what the Bank Bill Swap Rate does and not necessarily the cash rate, and that’s what we’d like our customers to be aware of.
The media will often talk about the fact that the RBA cash rate hasn’t changed and often customers will see that their interest rate has and it’s of some concern to people and quite rightly, too. We understand the concern that comes from that and what we’re trying to do today is give you a little bit of an explanation and while it doesn’t necessarily take the sting out of the fact that interest rates sometimes increase at least if we give you a bit of information you’ll understand why it’s happening.
One of the questions we get asked most frequently is why is there a difference between new business pricing and existing customer pricing and that’s a very good question. We know that there is concern from our existing customers about why interest rates change for them and why sometimes there are better rates for new customers. The answer to that question is once again in the bonds and the yield that we pay to investors on each of those bonds. The yield and the Bank Bill Swap Rate are the things that define the pricing on each bond, but the yield doesn’t move. As we said before we have to deal with the fluctuations in the Bank Bill Swap Rate, but the yield that’s applied to that particular bond at a particular point in time doesn’t change. The bond market moves in cycles and sometimes we’re able to finance groups of new loans by issuing bonds at a different bond yield than we’re paying on existing loans. This means that we will offer a different interest rate on the new loans financed by those bonds than we can offer on our existing loans, which depending on conditions in the bond market could be higher or could be lower. But for our existing customers it means that we actually have to look at the interest rates that we can apply based on the point in time when that bond was originally created. And while this is actually pretty tough to take and we understand and feel your pain it is something that we need to consider.
So with all these factors to consider the one thing that we hold dear is our ability to actually remain competitive across new business rates and existing customer rates. We do endeavour to make sure that all of our customers, whether they be new or existing, get a fair go and know that they are on a good deal regardless of what’s happening in the market.
Another question we get asked quite often is why is there a difference in pricing between principal and interest loans and interest only loans, or owner occupied and investor. In 2014 regulators started focusing on investment and interest only loans. Their primary concern was borrowers being over exposed to levels of debt and on the other side of the fence lenders also needed to think about how many of those customers they had in their portfolio and whether or not that was actually a reasonable risk to undertake as an organisation. To deal with the perceived risk by the bond investor of these types of loans and these types of situations the yield on the bond is more expensive. It costs us more to get the money. As a result pricing on these types of loans are higher than on principal and interest and owner occupied loans.
We hope this information clarifies any questions that you might have. Please be assured that we will always endeavour to give you the most competitive interest rates possible and we really appreciate your business.
Thanks for watching.
Who is State Custodians?
State Custodians is one of Australia’s most awarded online lenders.
Our team is focused on finding ways to help our customers achieve their goals, creating an outstanding borrowing experience.
Leading Online Lender
Providing home loan borrowers a real alternative to the banks since 2007
Awarded 2019 Best Investor Home Loan,
Backed by Resimac
Funding home loans for over 30 years and hold a 'STRONG' servicer ranking by Standard & Poor's