Posted November 15, 2018 14:50:16 A new interest rates announcement by Australian banks is likely to be controversial, with some worried it will drive up costs and force borrowers to switch banks or risk losing their home loans.
Key points: The Federal Government has said it wants to give Australian banks a new incentive to lend, but the banks say the move could be damaging to borrowers’ confidence in the banking system, as they could face life or death situationsIf a bank doesn’t have enough borrowers to meet their new interest-rate requirement, they could lose their home loanThe Australian Bureau of Statistics said the average cost of a home loan was $1.15m in September, down $4.5m from September 2017, while the cost of an interest-only loan, on the other hand, rose by $1,200.
Key points: Bank of Queensland and RBA have released a statement warning the announcement will increase costs for borrowersKey points for borrowers:Banks are offering to give a new interest subsidy to encourage borrowers to swap banks or face life-or-death situationsThe Federal Government says the change will boost banks’ profitability, and allow them to lend more efficiently to borrowersThe banks say that the change is likely, as the Government’s plan will give banks a way to lend to borrowers with existing mortgages, but not to those with new ones.
The Australian Financial Services Union (AFSU) has warned the new rate will have an impact on borrowers’ ability to make good on their mortgage repayments.
“If a borrower’s bank is unable to offer a suitable interest rate for their new loan, they may be forced to make a life-changing decision about whether or not to pay their mortgage and if they should, in particular if they are facing the prospect of losing their property,” the union’s president Andrew Meares said.
The AFSU’s Mr Meares told the ABC it would be unfair to the average householder to pay a new rate of 1.5 per cent or higher for a home mortgage if they were unable to meet that interest.
“It would be much better to find a lender that can offer a rate of at least 2 per cent,” he said.
“This is not just about the cost, it’s also about the potential loss of a borrower.”
If they can’t make their mortgage payments, they will end up with nothing.
“Mr Meares also warned banks could be forced into life-and-death decisions, such as refusing to make loans, over the next two years.”
What happens is that a borrower is facing a decision between making their mortgage payment and going into debt and facing losing their investment,” he added.”
There are many situations where a borrower might have to choose between losing their money or their property.
“The potential consequences could be life or the death of a child.”
The announcement from Australian banks has been welcomed by some, with one bank president saying it would help the Australian economy.
“With a $1bn new lending program that will help Australian banks and businesses meet the unprecedented challenges that face our financial system, it is right that we give credit to the Government for making the right decision,” the bank’s chief executive Peter Watson said in a statement.
“In particular, the Federal Government is ensuring that Australian banks have a new loan subsidy program that helps them meet the new conditions on the books and encourages them to offer borrowers a more competitive interest rate, and to do so in a manner that is more cost-effective for the Australian taxpayer.”
The Australian Competition and Consumer Commission has also welcomed the decision to lower the current interest rate.
The regulator said it was concerned that the Government could increase the cost to consumers of a mortgage, and had asked the Government to ensure that this was avoided.
“We are concerned that if the new policy is implemented, consumers will not be able to afford the higher rate, which could potentially increase their mortgage costs and result in higher mortgage repayances, potentially leading to a higher default rate,” the ACCC said.
However, the Australian Institute of Financial Management has criticised the Government, saying it had not taken the time to fully consider the effect of the new interest policy.
“Many of the proposed changes to the banking industry are in fact very similar to the old, more-favoured-of-the-banking policies,” the institute said.
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