Nab Home Rise To Trigger Soaring Rates

The Age

Friday January 4, 2008

Ruth Williams

AUSTRALIAN home borrowers are set to be hit with another interest rate rise, as the big banks try to recover soaring costs caused by the global credit crunch.

Defying pleas from political leaders, National Australia Bank yesterday became the first of the main banks to lift its standard variable rates independent of any rise by the Reserve Bank.

NAB announced it would be charging home borrowers an extra 0.12 points on standard variable rate loans, and business borrowers another 0.15 points.

Defending the move - which is expected to be followed by other big banks - NAB said the rise would not even cover increased costs it has incurred from the global debt crisis.

Until this week, the big banks have been only been moving their main rates in line with changes in the Reserve Bank's official cash rate.

The NAB move could create controversy, coming soon after the bank's recent record annual profit of $4.6 billion, unveiled in November. Total profits at Australia's big four banks rose more than 10 per cent last year to almost $18 billion.

Treasurer Wayne Swan, who was told of the NAB decision before it was announced last night, called on the banks to spare homeowners the full flow-through of their increased borrowing costs.

"While this rise in variable mortgage rates is the direct result of the US sub-prime crisis, I would urge the Australian banks and other financial institutions to be very mindful of the significant financial pressures on families when making decisions on these matters," Mr Swan said.

NAB has the second highest market share in home loans among the big four banks, accounting for just under 16% of the market. The biggest is the Commonwealth, which accounts for more than one in five home loans in Australia.

The credit crunch has already resulted in loan refinancing problems for RAMS Home Loans and Centro Property Group. Other smaller lenders, including Adelaide Bank and Bluestone Mortgages, have already raised mortgage rates independently of RBA rate rises.

NAB's move will have an impact on hundreds of thousands of Australians, and many more will be affected if other major banks follow suit.

"We have a responsibility to meet the needs of our shareholders as well as our customers," an NAB spokesman said. "This decision has been made with a view to finding that balance."

Last night, Commonwealth spokesman Brian Fitzgerald said the bank would review its rates "in light of the latest news".

"We have clearly signalled in November that we'd be looking at this and as far as we are concerned our rates are still under review. It was inevitable if markets kept going the way they were."

While the Commonwealth has not yet moved on its variable rates, which make up the bulk of mortgages, earlier this week it lifted rates on new fixed-rate home loans by 0.3% to 8.64% for one to four-year mortgages.

ANZ spokesman Paul Edwards said that bank would make a call on whether to lift rates in the near future. "These pressures have existed now for almost 6 months and it's inevitable there will be pressure to pass that on," he said.

A Westpac spokesman said the bank's rates were "continuously under review".

The so-called credit crunch struck in August when, partly due to rising defaults in sub-prime mortgages in the US, the global costs of borrowing money increased sharply.

Recent profit downgrades by US banks with investments linked to the sub-prime loans have worsened the crisis by making lenders less willing to provide credit.

It means that the cost of raising funds overseas for banks like NAB has risen over the past six months.

NAB's home rate will go up today, adding about $4.60 a week to the cost of servicing an average mortgage. Business loans will go up on Monday.

Opposition Treasury spokesman Malcolm Turnbull this week urged the banks not to punish home buyers. He said the the banks should be careful before raising rates in response to what was hopefully a short-term increase in their borrowing costs.

While banks had to take into account changes in costs, they also had to show restraint in a volatile financial environment, Mr Turnbull said.

© 2008 The Age

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