Why has my rate increased?
State Custodians responds to recent queries about rate increases and answers some important questions.
Passing on mortgage rate increases is never pleasant. It inevitably causes a lot of frustration and often, confusion as to why it has occurred. Recently many Australian bank and non-bank lenders, including State Custodians, have been compelled to increase their variable interest rates due to shifting international market forces.
The increases have been across the full range of loans including principal and interest loans and interest only loans for both owner occupiers and investors.
State Custodians’ General Manager of Securitisation and Treasury, Andrew Marsden, says frustrations are understandable, and explains that in the case of State Custodians, decisions to change interest rates are driven by changes in external funding costs, not hunger for profits.
“We source our funding from wholesale capital markets which is one of the best means of raising funds for mortgage portfolios at the lowest rates possible,” he says. “However if our wholesale fund lenders tell us they’ve raised their costs, then that’s something beyond our control and we have to comply.”
Andrew stresses that Australia has long been in a fortunate economic position unlike other countries.
“Australia has a very robust, stable financial services sector. We got through the GFC because of it. We have conservative portfolios from a credit perspective and there has not been high risk lending activities compared to those of offshore banks.”
Martin North, principal of independent financial consultancy Digital Finance Analytics, was recently quoted in the Australian Financial Review highlighting the relevance of wholesale capital markets compared to the cash rate set by the RBA.
"The RBA decision to increase, or hold, rates is irrelevant, the issue is what's happening in the wholesale markets," he said.
Despite market movements, State Custodians has consistently offered one of the lowest rates on the market and always endeavours to keep rates as low as possible.
“We are able to provide very cost-effective rates through State Custodians because it is an online channel which taps directly into the wholesale capital market both domestically and offshore,” says Andrew. “Variable rates inevitably move up and down, but our rates over time have continued to be among the lowest available to Australian mortgage borrowers.”
State Custodians' General Manager of Marketing and Digital, Joanna Pretty, says that customers’ interests are at the forefront of all decisions.
“We know that interest rates have a significant influence on customer satisfaction,” she says. “As a lender that strives to provide among the lowest rates in the market we operate on a very low margin, and are therefore sensitive to changes in funding costs.
“When a change occurs to our cost of funds, we do our absolute best to keep any impact on our customers to a minimum.”
Due to the dynamic nature of how funding is obtained, on occasions the cost of funding existing loans can vary from new loans.
“We appreciate that this can be frustrating for our customers and we aim to avoid this situation whenever possible,” says Joanna.
We asked Andrew to answer some key questions in response to the recent rate increase.
Some of the wholesale funding for Australian lenders comes from overseas. The US Federal Reserve has increased rates citing a strengthened economic outlook for the country. This means bond yields (the amount of return an investor realises on a bond) which are major drivers of offshore funding, will be pushed up. So Australian lending costs will rise regardless of the RBA’s official cash rate decision.
What started to occur in the US markets around February was a lot of inflow of capital back into US dollars. This was largely attributable to the Trump corporate tax reform passed by the US senate. A lot of profits for major companies such as GE, Microsoft and Apple increased. And after a long economic slump due to the GFC, the jobs market in the US has regained strength.
Because a lot of Australian banks and non-bank lenders do a lot of short term funding with the US and swap it back to dollars, there’s been a corresponding increase in Australia regarding the bank bill swap rate – a short-term interest rate used as a benchmark for the pricing of Australian dollar derivatives and securities.
Decisions to change our interest rates are driven by changes in funding costs, not some kind of desire for profits. We never welcome passing on the increased cost of funds. We are very aware that low rates are important to our customers and that any increase has a financial impact. We’re also aware that happy customers are much more valuable to us than unhappy customers.
State Custodians is regulated by ASIC – the Australian Securities and Investments Commission. ASIC is an independent Australian government body that acts as Australia's corporate regulator. ASIC's role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors.