Are banks buttering us up for variable interest rate rises soon?

Banks are using carrot-and-stick tactics to lure people into variable-rate loans, but borrowers may soon a face stick-and-stick approach.

I have a spooky feeling that banks are preparing to begin increasing variable home loan interest rates, regardless of what the Reserve Bank of Australia does with its official cash rate.

Our RBA has consistently said it expects the cash rate to remain on hold at its current record low 0.1 per cent until 2024, or maybe late 2023 – but don’t expect that to stop banks from lifting mortgage rates on their own accord.

The idea of variable rates rises soon may seem odd given their most recent variable moves have been down, but a couple of profit disappointments from major home loan banks CBA and Westpac suggest we may not be too far away from increased interest costs.

The RBA uses its cash rate as a lever to try to control inflation and the economy.

In theory, cutting rates should boost consumer spending and inflation, while rate rises are used to slow things down by increasing business and consumer costs and stopping inflation from rising too fast.

In practice, record-low RBA rates in recent years have failed to spark stronger inflation and economic growth – with the pandemic a gigantic headwind. The RBA can’t really cut anymore, and financial markets are forecasting it will start raising rates next year despite it declaring it won’t.

Property owners and investors will soon see all types of interest rate going up.

Movements in the cash rate affect variable mortgage rates and other short-term interest rates, but they’re really just a guide. Banks have highlighted this many times in the past by only passing on some of the RBA rate cuts and pocketing a portion for themselves.

It would be unusual for them to lift variable rates without a nudge from RBA cash rate rises, but we live in unusual times.

Fixed mortgage rates have been surging higher lately because financial markets expect interest rates globally to climb sharply in the next few years, and banks don’t want every borrower locking in a low fixed rate for three, four or five years when financial market rates could be much higher by then.

They’re using a carrot and stick approach – the stick is the sharp rise in fixed rates to make them less attractive, while the carrot has been fresh cuts in variable rates.

Fixed rates used to be nowhere near as popular as they are today – now the split between fixed and variable home loans is about 50-50.

Borrowers chase value, and we now see big banks’ variable rates are lower than almost all fixed rate terms between one year and five years.

Loan experts expect the frenzied fixed rate rising trend to continue – CBA has done it three times in six weeks – and this will drive more borrowers to variable.

But then we could easily see variable rises. Both CBA and Westpac recently said their interest income was being squeezed and their share prices slumped dramatically.

If a bank is struggling to grow profits, it’s easier to justify trying to increase its profit margins through interest rate moves.

And if Aussie banks continue to disappoint financial markets, we could see their carrot-and-stick approach with mortgage interest rates to become a stick-and-stick approach.