More good news ...

Thanks Peter

 

A rise in bond yields affects the cost of fixed rate money. The cost of money is determined against yield spreads on US treasury bonds, typically. So when bond yields increase, so do fixed rates.

Variable rates on the other hand are priced differently. Their pricing is linked to the cash rate + whatever the secruritisation markets are charging above that cash rate... so variable rates shouldn't be directly affected by bond yields increasing.

That being said, securitisation markets may elect to re-price the spreads they want on variable money , over and above the RBA cash rate......so one could argue that the increasing bond yield may indirectly affect variable rate cost of funds. Unlikely though. And to be fair, they can change what they charge for variable rate spreads whether treasury bond yields are moving up or down , anyway - as we saw during the GFC and for 3 years or so afterwards - if you recall, banks failed to pass on rate cuts in full at various times, and even increased rates out of line with the RBA - ANZ even dropped RBA pricing altogether and publish their rats fortnightly now, completely independent of what had been the nrom for @ 30 years ...

While that was understandable while securitisation spreads were up and down like a yo-yo following the GFC, it is no longer a valid reason. Securitisation markets have been back to very stabilised pricing /spreads for 3 - 4 years now... so any move to lift variable rates under the guise of increased bond yields is simply a gouge in my view.


In a nutshell.
The fixed rate increases are banks pricing in the increased cost to buy fixed term money.
The variable rate increases we are seeing now are simply banks taking extra margin because they can...

by late 2017 /early 2018, BASEL IV requires that banks have to raise more capital and move to 12 month RMBS , so I expect funding costs for variable rates to legitimately move upwards in the vicinity of 30-45 bpts.

So even if the RBA were to cut another 25 or 50BPTs, I don't think you'll see much of that in your actual pocket , in real terms.... P&I borrowers might see a decent bit of it. I/O borrowers will subside that, so if it happens, I dont think they'll see much of it passed on at all...

 

The problem with this is bank behaviour and real world impact

Bank behaviour - even if the RBA cuts 25 points and the banks only pass on 10 or 15, after already lifting I/O rates by the same....there is no net change.

If they cut by 50, and the banks pass on 20 or 30.... after lifting 10 or 15...the net gain is tiny - and the RBA will have further crippled savers and retirees.

We have seen from any country you want to look at in the Northern hemisphere that no matter how low rates get, economic improvement doesnt follow....

Real world impact - with no changes whatsoever to sensitised assessment rates or HEM's , even if rates drop to 1% , investors will get zero improvement in borrowing capacity at most lenders. The only place a lower rate will provide you with any advantage ( for borrowing capacity) is Liberty or Pepper or possibly Latrobe or Qudos. - and you'll pay premium rates for the privilege - cancelling out any hip pocket benefit .



I would much prefer cash rate didnt fall any further, but instead, this Govt issued several hundred billion of cheap 30 year Aussie debt, and got about the business of a 20 year infrastructure /nation building plan that actually lifts income and GDP and gets the engine going again...

 

Here ya go...just in time for Xmas...

 

Again I am no expert, quite the contrary to someone like @euro73 but to say the recent increases were not simply the banks positioning them self for the next RBA cut IMO is naive.

Banks have/will increase, RBA will cut, banks will pass on .08 and we are back to square.
What will happen though is the recent increases got from what I saw very little mention in the mainstream media. Another RBA cut though and the cries of "lowest ever interest rates" yet again will have more people off to their bank/brokers for the age old "How much can I borrow, what will my repayments be?"

Translation = Boom Boom to continue!

 

Maybe... but the answer to how much can I borrow won't change. And if there's a NET improvement of zero to rates, nor will repayments .

 

Absolutely not but it's mindset and media which will further drive pricing. You know it makes no difference, I know it makes no difference, most PC members know it makes no difference but do you know who doesn't.....99% of everyone else!

Media will plaster another rate drop all over the place, buyers who maybe didn't ask the question to their brokers before will now. Maybe those that did ask will start asking how they can borrow even more because after all "lowest rates EVER"....and maybe "yeah I will sell my car now so I can get a higher loan and I'll just buy one afterwards"...and so it goes.

 

And don't forget it's those that aren't really effected by these changes that drive the prices. It's the dual income households with no kids or kids have moved on that will always cause the peak of the markets.

 

Im not convinced the RBA will feel a need to cut rates. A lift in the US fed rate will possibly do the work for them by effectively lowering the AUD ... so lets see what the first quarter of 2017 looks like... and before that lets see how many more lenders push variable rates up before Xmas

 

ING's turn

Challenger bank hikes variable rates

 

Yep. I logged in today to be greeted by this message:-

Important message
Rate change


Variable residential home loan interest rates are going up by 0.15% p.a. on 12 December 2016, and new repayments come into effect in January:​

• 
  
  • Interest only repayments - increase starting 1 January 2017.

  
  

  • Principal and interest repayments - increase starting 30 January 2017.

  ​

I have a rate discount so it doesn't affect me much but it makes the fixed rates look more attractive.

 

Round and round we go - ING tipping into the owner occupied rates at the same time.

 

More good news to come too no doubt.

 

Would 1% increase in variable rates be enough to turn Melbourne market?

 

I think you better check. My reading of it was everyone's variable rate increases, regardless of discount. They are changing the reference rates the discounts work off.

 

Depends how - 1% over night would certain cause problems.

But it will probably be 0.25% increments over 2 years or so. The RBA will left rates and monitor the markets for a few months to see the effect and then lift a bit more.

People adjust and won't notice it so much.

 

Yeah sorry, I didn't state that very clearly. Yes, my rate is going up but because I am on a very low rate it means that after the increase I will still be on a low a rate. That's why I said it doesn't affect me much.

 

A 1% increase and a whole lot of I/O reverting to P&I is where there would probably start to be some pain for investors in particular....

 

If they didn't plan ahead. Which a surprising number don't plan ahead.

 

Even if they did plan ahead IO loans revert to PI and fixed loans revert to variable.