Greater Risk is Reason for Higher Small Business Loan Interest Rate

A comparison website noted the growing gap of rates between small business loans and residential mortgages. When banks pass on Tuesday the Reserve Bank of Australia (RBA) overnight cash rate cut to small businesses, the average rates for secured loans would have gone down by 100 basis points to 7.53 per cent.

In contrast, comparison Web site RateCity pointed out those home loans will get a larger 103 basis points cut as the big four's average standard variable goes down to 6.76 per cent.

RateCity explained the difference to the higher risk of a default by small business borrowers compared to home loan mortgages.

"Higher risk often brings higher costs, so it makes sense for interest rates to remain higher for variable business loans compared to variable home loans," The Sydney Morning Herald quoted RateCity spokeswoman Michelle Hutchison.

The rising number of small business failures which pushes delinquency rate was also factored in, ANZ told a Senate inquiry last week.

Greg Evans, the director of economics at the Australian Chamber of Commerce and Industry, pointed out the lesser transparency among small business lending such as failure of banks to inform them of rate changes, which in turn affects business confidence due to the lack of certainty about pricing decisions of banks.

Only 32 Australian lenders out of 112 that RateCity covers, have decreased their mortgage rates by an average of 20 basis points or 80 per cent of the RBA rate cut.

However, Ms Hutchison conceded that it is an improvement from the May rate cut when banks passed on the average only 64 per cent of the RBA 50 basis points rate cut to variable home loan customers and pocketed the remaining 36 per cent.

ANZ Bank, in a surprise moved, opted to pass in full the 25 basis points overnight cash rate reduction made by the Australian central bank, which lowered its variable mortgage rate to 6.8 per cent. However, among the big four, the lowest standard variable mortgage rate is that of National Australia Bank whose 21-basis points cut brought it down to 6.78 per cent.

While Unicredit-WA, based in Perth, made a similar 25-basis points cut in its lending rates, the latter's standard variable rate is lower at 5.85 per cent. Online lender Pacific Mortgage Group's rate is even lower at 5.72 per cent.

However, RateCity warned Australian borrowers that the ongoing financial crisis in Europe could cause incremental rate increases.