Interest Rates for Business Customers
While the Reserve Bank has maintained the cash rate at 2% for the past ten months, we have recently seen three of the big four banks lift their base rate lending margins to customers. ANZ increased its margin to business clients by .21%, National Australia Bank increased by .29%, Westpac announced on 22 February 2016 that they will increase their base margin to business clients by .23%.
Individual investors have not been spared either, with all the banks progressively lifting interest rates on investment loans and lines of credit.
Why are the banks lifting interest rates when the RBA is keeping the cash rate on hold?
The banks need to raise funds in the wholesale market to on-lend to businesses and consumers. They raise funds at different times and the cost differs with each tranche of wholesale funding. The banks are being honest when they say their wholesale cost of funds are increasing and they need to set aside more capital to meet more stringent prudential guidelines.
The banks also need to deliver ongoing and increased returns to shareholders. In a benign lending environment the only profit lever a bank can pull is the margin lever and therefore a portion of recent interest rate rises can be attributed to the banks’ need to increase profit and this fact is not voluntarily disclosed by the banks. RBA Governor Glen Stevens has also publicly criticised the banks for unnecessarily skimming margin from customers.
What should customers do?
Business owners should be aware that the banks’ base lending margin is only one part of the equation. Banks apply a risk premium or margin to the specific client over and above their base lending rates which all differ slightly. This together with other account keeping fees etc, forms the effective lending rate the customer pays.
The good news for business owners and individuals is that there is still competition in the market place. You may be surprised at the savings that can be achieved by reviewing your loan facilities. Specifically it is the margin applied above the banks’ base lending rates that can often be renegotiated to offset some or all of the increase that your bank has recently passed on.
Please feel free to contact your Accounting Partner or the McLean Delmo Bentleys Finance team for an obligation free appraisal of your current loan pricing.