Banks will raise rates before RBA lifts: Expert

A sharp rise in bank funding costs could force up variable mortgage rates in the next few months, before the Reserve Bank decides to start lifting official interest rates.

While a growing number of pundits expect the RBA could start lifting rates as early as before Christmas, Damian Smith, the chief executive of rates comparison site RateCity, believes the big banks could lift their rates independent of any RBA move.

“The best indicator of what rate banks are paying to borrow their funds is the 90-day Bank Bill Swap Rate, and this has risen from 3.36% to 3.45% in the last couple of weeks alone,” Smith says.

He also points out that the four big banks have held rates steady for about seven months and several banks, including the Commonwealth Bank, have signalled they may raise rates separate to the RBA.

Smith expects the current average standard variable interest rate of 5.5% to rise to 5.65% in the coming months.

“We think that the short-term movement will be pretty small – about 0.15%. For most people that won’t have a dramatic impact. People will be handing back less than a 10th of what they have gained in the last 12 months. “

However, if predictions of a few rapid rate rises over the next six months hold true, mortgage stress could hit.

“There will be a lot of people who will struggle to afford the mortgage if rates go up by 2%.”

However, Smith says higher rates will have an unusual bonus in that it will be easier to shop around for better variable rates.

“As rates go up the room for variation between banks goes up. Already there is an enormous spread on what people are offering on variable loans and fixed loans.”