The perception is that lenders in Australia move their standard variable rates in line with the Reserve Bank of Australia (RBA) cash rate. RBA raises the cash rate, lenders raise their standard variable rate for the same amount, RBA lowers the cash rate and lenders lower their standard variable (not always by the same amount!).
But last week we saw 2 major banks move their standard variable rate outside of a cash rate move from the RBA. Westpac raised its owner occupier rates by 0.03% and their investment loan rates by 0.23%, with NAB moving their owner occupied rate by 0.07% and their investment loan rates by 0.25%.
So what is going on? One might think it is a cash grab from lenders – who would be surprised, right? But perhaps all is not as it seems and the RBA has lost its control over loan interest rates in Australia.
In 2014 the Australian Prudential Regulation Authority (APRA) wrote to Australian Authorised Deposit-taking Institutions (ADIs) reinforcing sound residential mortgage lending guidelines. One of the guidelines relates to the grown of investment lending in Australia. APRA noted that “annual investor credit growth materially above a benchmark of 10 per cent will be an important risk indicator that supervisors will take into account when reviewing ADIs’ residential mortgage risk profile and considering supervisory actions.”
What does this mean in everyday language, ADI’s (Banks) will be considered as not adhering to sound lending practices if they let their investment loan book grow to more than 10% of their overall lending book (owner occupied loans plus investment loans).
So how do banks slow down the growth of their investment lending book, raising interest rates, of course!
With APRA applying harsh penalties to lenders who do not adhere to the 10% rule, banks are scrambling to implement policy changes, like lower lending value ratio (LVRs), tightening policies around how lenders determine how much you can borrow and of course raising interest rates.
So the question begs, with banks making changes to interest rates so they can adhere APRA guidelines, does the RBA have any control over interest rates in Australia, or are the cards now in APRA’s hands?