Despite The Reserve Bank of Australia (RBA) stating on multiple occasions that are not expecting to increase rates until 2023-24, conjecture continues to emerge that lending rates could rise sooner. The speculation and discussion which at times has bordered on suggestions to the RBA have continually been countered by the RBA Governor, Philip Lowe.
Many of these speculative pieces were around the RBA moving on rates to dampen the rising house prices. Prices are being driven up due to historic low home mortgage interest rates. But recent media pieces regarding home loan rate rises centre on another factor – the end of TFF, Term Funding Facility. To clarify and inform, we provide this explainer on TFF and its effect on interest rates.
Official Cash Rates
The Reserve Bank of Australia (RBA) is the body tasked with the setting, what is generally referred to as interest rates. In reality, the RBA does not set the interest rate that you may pay on your boat loan, home mortgage or any other type of finance. The RBA sets the official cash rate. That is the interest rate that banks pay on unsecured overnight loans or the market interest rate. Essentially, the interest rate that some banks pay to secure their funds.
The RBA is responsible for Monetary Policy, as opposed to the Government’s responsibility for Fiscal Policy. This involves using interest rates and other levers to effect change in the economy. Due to the economic impacts of the coronavirus, the RBA cut the official cash rate to the historic low of 0.1% in 2020 to create cheaper funding and stimulate the economy. In other words, to make it cheaper to take out loans. More information here.
This is the rate that banks and other lenders use as the base for setting their own interest rates across their savings and lending sectors.
TFF – Term Funding Facility
Enter another factor that has been keeping interest rates low over the past year – TFF, Term Funding Facility. As another lever in their economic fight against COVID-19, the RBA introduced the TFF scheme. This is a 3-year funding scheme for ADIs (authorised deposit-taking institutions which essentially means banks) to access low rate funds to encourage them to lend to their customers to support and stimulate the economy through lending to businesses, especially SMEs.
It was commenced on 19 March 2020 and you may recall talk around ‘cheap funding for the banks’ as part of coronavirus stimulus packages. There was $200 billion set aside in this emergency funding pot but there is a deadline for banks to apply to access the funds.
The TFF scheme expires on 30 June 2021. A date that is fast-approaching and why some analysts have started talking about how this would, could or will impact interest rates. With this cheap source of emergency funding removed, banks could revert to being reliant on the usual sources of their funding which could be at higher rates.
Rate Increases: Theory, Speculation and Reality
With banks able to source their funds at such cheap rates through TFF, some experts are talking about how the end of TFF will increase the costs to banks of acquiring their funds and hence they would need to increase the interest rates they offer on lending.
The differences in these rates may appear small, 0.1% compared with 0.25% but as we constantly emphasise, any small variation in the interest rate can add up to a significant amount over the full term of a boat loan.
While the talk is focused on home loans and experts predict that the effect of the expiration of cheap funding sources would take some time to flow through to the market, it is a factor worth considering for those in the market for a loan. Many are urging those with home mortgages to fix their rates now.
Boat Loans Interest Rates
So how could all this impact boat loan interest rates? The prospect of a rise in rates in some sectors can of course flow on through others. Both banks and non-bank lenders set rates at different levels for different areas. Home loan rates are at different levels to consumer lending rates for goods such as boats and cars.
The TFF only applies to deposit-taking institutions which would not include non-bank lenders. Jade Boat Loans is accredited with multiple lenders including banks and non-banks, so we have an extensive lender panel from which to source the cheapest boat loan offers for our customers. Feel free to utilise our boat loan interest rate tool to compare figures from a wide range of banks and lenders.
Currently, boat loan interest rates are low and while the market could be looking to the RBA’s 2023/24 timeline for any major increase, the prospect of an increase due to these other factors is a possibility.
We arrange boat loan refinancing at fixed interest rates. So if you have an existing loan and interest rates do rise, your rate will not change. Unlike home mortgages which only have a set time for fixed rates, the fixed-rate on boat loans is for the entire loan term.
If you arrange a boat loan today at our current cheap rates, you will enjoy that cheap rate over the full 1-7 year term of your loan, regardless of what happens in the home mortgage interest rate area.
To arrange fixed interest rate marine lending, call 1300 000 003
DISCLAIMER: THE INFORMATION AND SPECIFIC DETAILS CONTAINED IN THE CONTENT OF THIS ARTICLE HAVE BEEN PREPARED AND ARE PRESENTED PURELY AS GENERAL INFORMATION AND NOT INTENDED AS THE ONLY SOURCE OF FINANCIAL ADVICE FOR BOAT BUYERS AND LOAN BORROWERS. FOR THOSE THAT CONSIDER THEY REQUIRE SPECIFIC ADVICE, THEY SHOULD CONSULT WITH A FINANCIAL ADVISOR. LIABILITY IS NOT ACCEPTED IN REGARD TO ERRORS AND MISPRESENTED DATA AND DETAILS HEREIN.