The Commonwealth Bank will increase variable home loan rates by 0.15%. The move which was announced today, will take effect on November 20th. CBA is the second major Australian bank to increase their standard variable rates. Last week, Westpac Announced that they will increase their variable rate by 0.20%. It is expected that ANZ and NAB will also lift their standard variable rates.
Like Westpac, Commonwealth is says the rate hike is a reaction to the regulatory changes announced by APRA in July. From July 2016, banks using the Internal Ratings Based (IRB) system for credit risk management, will have to increase their capital adequacy requirements. Several banks including Westpac and Commonwealth, have already changed how they treat investment mortgages.
The increased capital requirement will make lending less profitable. The banks will have to hold more cash on deposit for every dollar loaned out. CBA is protecting their profitability at the expense of their home loan customers. After all falling profits will hurt the share price. It's a balancing act between looking after customers and looking after share holders.
After Westpac announced their rate increase, shareholders showed their approval by pushing the share price of WBC up by 4%. It will interesting to see how shares in CBA react to today's announcement that they will follow suit.
What Does This Mean for Borrowers?
If you have a variable rate home loan with one of the major banks, there is a good chance that you will feel a rate rise before the end of 2015. How much the rates go up will depend on which bank you are with, and their internal strategy.
There is some silver lining in this situation! Some economists believe that if the banks lift their variable rates, then the Reserve Bank will but the official cash rate and take it a new record low, below the current 2.0%. This will help cancel out the increase in standard variable rates, if the banks pass on the cut. As we have seen, banks don't always pass on rate cuts.
If you have a variable rate mortgage with a major bank, then now is a good time to shop around for better deals. You might consider fixing a portion of your home loan, or refinancing to an alternate lender, who does not use the IRB system, and might not deliver their own rate rise.