Due to the collapse of the Bretton Woods System and American extremely loose monetary policy and oil dollars rolling into the third world countries in late 1970’s and early 1980’s, the cash rate had a large reduction. After 1990’s Asian Financial Crisis, the cash rate fell down and never rises again. Then the first part of the report includes the chart of RBA cash rate historical change data through 1976 to 2010 and the analysis of this chart which highlights the main trend and feature of cash rate change.
Another part of report shows five different factors that impact the variable rate to which factors (if any) most influence the variable rate of these 198 kinds of home loans products. There are over five tables and charts being used to summarise five relevant factors that are institution type, redraw, portability, offset, total upfront fee and yearly service fee respectively. This report illuminates the key features and analysis paragraphs for each factor. It can be seen that institution type influenced the variable rate most and other factors had tiny impacts on the variable rate.
In conclusion, this report talks about the historical data of cash rate from Reserve Bank of Australia and the data of different home loans products in current market. Furthermore, this report analyses these two datasets in terms of the variation of historical cash rate as well as the influences from the different factors of the home loan products. From all the findings we find that the institution type influenced the variable rate most. However, other factors had tiny impacts on the variable rate. The advice for consumer is that they should pay attention to the institution type when they choose home loan service in the future as it impacts variable rates the most.
In Australia, there are different types of home loans products currently available in the market that provided by banks and other organizations. Interest rate is one of the major determining factors in many borrowers’ decision. Two types of interest rates - variable rates and fixed rates are based on different financial market indicators. According to Gambacorta(2008), variable rate refers to an interest rate that fluctuate over time based on the changes of an underlying interest rate index. Moreover, variable rates can be influenced by kinds of factors such as institution types, total upfront fees and yearly service fees. This report will focus on analyzing two sets of data which are interest rate data and historical data respectively.
2.0 Outliers
Outlier is an observation that lies an excessive distance from other data which lies outside the overall pattern of a distribution. However, sometimes it is difficult to realize what factors caused this situation. Therefore, it is important to identify the outlier due to it is possible to affect the accuracy and cause the systematic errors if people cannot handle it properly.
Z score formula is adopted to identify potential outlier. When the Z score is above 3.0 or below -3, it is considered to be an outlier. It has been calculated that from the data that has been provided, the Z score is within the range of -3 and 3 (see appendix 1). As a result, the outlier will not remain in the data of this report.
3.0 Historical analysis on cash rate tendency
Cash rate is the interest rate paid by bank which affected by transactions between the central bank and other financial institutions. Figure one illustrates the variation in the percentage of cash rate from May 1976 to March 2010. As can be seen in this line graph, there was a significant increase in cash rate during the first six years and it reached a peak at 20.77% in August 1982. However, an obvious decline was seen in cash rate since September 1983 and the percentage dropped to 4.76% which was the lowest point within nearly eight years. Moreover, the cash rate fluctuated a lot over the next six years and it reached a peak again in November 1989 at 18.18. Whereas, from this year onwards, the growth of cash rate was suddenly replaced by a sharply downward trend. This is probably because RBA tried to decrease the negative effects which were brought by savings and loan crisis in the early 1990s to Australia. It is interesting that after September 1991, although the cash rate still changed with some ups and downs, it tended to be stable and maintain below 10%. Besides, from May to September 2009, the percentage of cash rate keeps remaining at 3% which is the lowest data over the 15 years. It shows that the world economy seems to be growing again and Australian economy is recovering as well after the global financial crisis which started from 2008.
4.0 Current market
The global financial crisis had resulted in the economic downturn since 2008. In Australia, in order to decline the negative effects brought by this severe crisis, the main financial institutions decreased the percentage of home loan interest rates at that time. However, at the beginning of 2010, RBA improve the interest rates which means homeowners have to pay more on their mortgages. Meanwhile, there are some major banks include ANZ, the Commonwealth Bank also followed the RBA, lifting their interest rates by a few points. On the other hand, it shows the world’s economy is growing while the economy in Australia is recovering as well. In this section of the report will focus on the home loan variable rate and what factors influence it.
4.1 Distribution of variable rate
The distribution of variable rate will be discussed in the paragraph below. This histogram demonstrates the changes of variable rate in relation to the different types of institutions. According to the data that has been provided, the institutions are tending to the interest rate of 5.75 to 7 percent which located in the third, fourth and fifth highest group of rate in the graph. In addition, only four institutions have the lowest rate and two have the highest rate. Therefore, it can be concluded that most institution may located in the interest rate group that is not too high or too low. This can be also revealed in the Table1 that the mean and the median is within the range of 5.75% to 7%. The reason for this circumstance is that if the rate is too low, institutions may be not able to earn profit and if the rate is too high, customers may not choose them.
| sum | 1268.57 |
| mean | 6.41 |
| max | 7.26 |
| mini | 5.67 |
| median | 6.38 |
4.2 Bivariate relationships
4.2.1 Relationship between variable rate and institutions types
This paragraph will analyze the different institution types in relation to variable rate. Accordingly, most bank institutions concentrate on the rate between 5.75 and 7.25 percent. A vast majority of banks is located in the group of 7 to 7.25 percent which is the second largest group. Furthermore, there is no apparent relationship in terms of the types of financial institutions. Therefore, the types of financial institutions may not influence the variation of interest rates predominantly.
4.2.2 Relationship between variable rate and redraw facility
Figures 4 represents the relationship between interest rates and redraw facility. As can be told from the chart, when variable rate is intermediate between 5.5% and 6%, all financial institutions allow customers to redraw their extra funds. However, there are some mortgage lenders reject borrowers’ requests of redrawing money when interest rate fluctuates between 6% and 7%. If borrowers’ money is tight, they can access the funds later when interest rate is above 7%. The redraw facility gives borrowers an incentive to make extra loan repayments, because it helps them repay the debt and saves money on interest which is one of the most significant advantages of this home loan feature.
4.2.3 Relationship between variable rate and loan portability
The bar chart above shows information about variable rate and loan portability. It can be observed that this relationship is similar to variable rate and redraw facility. Around 23% financial institutions do not permit borrowers to move a mortgage from one property to another when the interest rate varies from 5. 75% to 7%. But when the interest rate is over or below that range which was just talked about, almost all lenders agree that borrowers can transfer the outstanding balance of the existing mortgage loan at the same rate. This may because the interest rates are higher than the traditional loans to some extent, so borrowers need to have perfect credit.
4.2.4 Relationship between variable rate and offset facility
This bar chart illustrates whether the financial institutions have offset facility in relation to the variation of interest rate or not. It can be shown from figure 6 that the percentage of institutions to offer offset facility seems to be distributed similarly. That means the amounts of institutions in different groups are distributed equally. Offset facility can not only decline the unpaid balance of customers’ home loan but also accelerate the speed of paying home loans. The reason why some financial institutions refuse to offer offset for customers might be the risk of paying back the loans.
4.2.5 Relationship between variable rate and total upfront fee
Figure 7 gives a description about the association of variable rate and total upfront fees. Based on this data, the scatter diagram shows a strong positive relationship. It means that the more total upfront fees are required, the more variable rate will be allocated. Hence, the total upfront fee plays an important role in the variation of interest rate. In addition, this figure also most points concentrate between 6 and 7 percent of variable rate. In the next section of the report the relation between one year service fee and variable rate will be examined.
4.2.6 Relationship between variable rate and yearly service fee
With respect to Figure8, the yearly service fee and the variable rate are displayed. Figure8 indicates a weak negative relationship of the yearly service fee and variable rate. The correlation is calculated to be -0.097 which means the tendency of linear regression goes down slightly. Subsequently, decreasing of yearly service fee may give rise to the increase of variable rate.
5.0 Conclusion
In conclusion, the variable rate of home loan is an important factor in relation to diverse home loan products in the current market. It has been proved that the Z score of the values is between -3 and 3 which indicates that the data can be treated as an outlier. The historical data illustrates that the cash rate changes frequently for the reason of financial crisis. Moreover, in consideration of the factors including institution type, redraw facility, mortgage portability, offset facility, total upfront fee and yearly service fee, it has been discovered that total upfront fee and yearly service fee may impact the variation of interest rate.
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