More Banks To Lift Home Rates

The Age

Monday July 14, 2008

Danny John

NATIONAL Australia Bank and Westpac are expected to add to pressure on home owners and businesses as early as tomorrow, as they prepare to catch up with the latest rises in rates on standard variable home loans with increases of up to 0.15%.

The country's second and third-largest banks are set to follow Commonwealth Bank and ANZ in lifting rates well above 9.5%, reflecting renewed volatility on international credit markets.

St George went first on July 4 with a rise of 20 basis points, taking its standard rate to 9.67%, yet a further sign home loan interest costs could reach double figures by the end of this year.

Commonwealth Bank and ANZ followed on Friday with rises of 14 basis points (0.14%) and 15 points respectively. That put CBA's main mortgage offering at 9.58% and ANZ at 9.62%. The new rates take effect from today.

The latest rises mean highly geared home owners can expect to pay at least $260 more a month on the average $250,000 mortgage than they did last November, a rise of 1.6percentage points.

The Reserve Bank has raised its cash rate by 1 percentage point to combat rising inflation, but the banks have raised the stakes in almost unprecedented go-it-alone increases to meet problems with funding costs.

The rate rise are affecting loans being written. Latest figures show the value of housing finance commitments in May fell 5.7% on the previous month, a decline that has been accelerating over the past quarter.

Merrill Lynch analysts believe the June figure will be equally weak, and say this could continue until at least September. Merrill said financial 2007-08 was likely to be the worst for housing finance since 1970.

The crisis is also eating into the banks' margins. They are estimated to be recouping only 50-60% of the costs of providing home loans. Credit Suisse believes that, as a result, mortgage costs will only go higher as the banks look to recover more of their own costs.

The situation is unlikely to improve soon. Nervousness in international debt markets is increasing, with jitters over the long-term survival of giant US mortgage providers Fannie Mae and Freddie Mac and the federal bail-out of IndyMac.

Successive bad news arising out of the subprime loan crisis and the wider bad debt exposure of leading US banks initially closed down traditional sources of cheap financing for institutions around the world. They reopened, but with credit costing a lot more. In the past two weeks there has been a renewed jump in credit costs that has put extra financing pressures on domestic banks.

NAB and Westpac are now contemplating increases of 12-15 basis points as they formulate their responses to the latest increase in funding prices.

The latest widening in credit spreads has had all banks grappling with an additional 1 percentage point - 100 basis points - above the rate the Reserve Bank has charged since last August.

Yesterday a Westpac spokeswoman would not comment on the prospect or timing of another rate rise. She and a NAB spokesman confirmed rates were under review.

The two banks last announced increases in loan charges at the end of April, when both pushed through rises of 10 basis points.

Personal, car, credit card and business loans costs have been rising too, with companies paying up to 20 basis points more than the new rates applied to mortgages.

On Friday, CBA added an extra basis point to its business loans.

© 2008 The Age

Back to News Index | Back to Home