Sourced from AFR by Duncan Hughes 17/07/2018
The big four banks, which account for more than eight in 10 of the nation’s mortgages, are expected to raise rates because of soaring funding costs, according to Citi.
Major lenders, and their smaller mortgage-centric competitors, can no longer afford to absorb the rising costs of their residential loan books, which account for more than 55 per cent of their total loan portfolios, its analysis warns.
The out-of-cycle rate hikes are expected to average around 8 basis points across their residential lending products with interest-only investor loans expected to rise more.
The largest mutual, Heritage Bank, will raise owner-occupier and investment variable rates for new and existing borrowers and bridging loan finance by up to 30 basis points from Monday.
The big four are expected to start raising rates before the end of their financial years at the beginning of September.
For a $1 million borrower on a 30-year term with a 20 per cent deposit, an 8 basis point rise will mean an extra $45 a month for a principal and interest loan, says Canstar. That rises to $67 for an interest-only investor.
This will increase financial stress on many household budgets already struggling with record levels of debt as the average debt-to-income ratio tops 200 per cent.
For example, four in 10 loan applicants – including borrowers attempting to refinance existing property loans – are being rejected because lenders are toughening scrutiny of their capacity to service a loan for the full term, according to analysis by Digital Finance Analytics.
“We expect the major banks will tread carefully and aim to balance the competitive and regulatory pressures by repricing 8 basis points on average across mortgage portfolios by September,” Citi says. “Further repricing will likely be required in 2019 should the spike sustain.”
Major banks are also under pressure over out-of-cycle rate rises from the adverse publicity they have receiving about their lending practices from witnesses at the banking royal commission.
Citi believes the regulatory reaction “is likely to be muted”.
“The major banks will be conscious that if they don’t reprice, they may be perceived as using their considerable size and diversification to squeeze their smaller competitors,” it concludes.
Short-term bank funding costs have spiked to about 60 basis points, or three times higher than historical averages, increasing funding of mortgage portfolios, according to Citi analysis.
In most cases the higher cost is automatically passed onto business lending customers, its analysis shows.
Banks had been willing to absorb the costs in a bid to build market share and boost profitability in the engine room of their profitability.
But the “unusual and sustained” spike is “seemingly here to stay”, having remained elevated since February with few signs of reversing, according to Citi analysis.
Five lenders have recently announced mortgage rates of up to 40 basis points amid warnings they can no longer absorb the impact of rising funding costs on net interest margins.
Smaller bank bosses warned others will follow a spike in 30 and 90-day bank bill swap rate, a short-term money market benchmark interest rate, increases pressure on their ability to offer competitive lending and attractive fixed rate saving rates.
Lenders are also increasing rates on lines of credit, which are popular features offered to property owners allowing them to use the equity in their properties as an ATM.
Bank of Queensland, one of the nation’s major regional banks and listed on the ASX, is increasing variable home loan rates for interest-only owner occupiers and investors by up to 15 basis points.
Owner-occupier and investor lines of credit are increasing by 10 per cent.
Other lenders to have recently increased rates include IMB and Auswide, Suncorp and ME Bank.
Heritage Bank will announce on Monday that it will be increasing owner-occupier and investment variable rates by 5 basis points.
Bridging loan finance for owner-occupied and investment loans will rise by 30 basis points.
The bank has also reduced rates on some popular products, such as its popular two-year fixed rate by 20 basis points.
The Reserve Bank of Australia has kept the official borrowing costs unchanged at 1.5 per cent for 19 consecutive meetings, a record period.