Westpac first off the block with out of cycle rate hike

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WESTPAC has become the first of the big four banks to lift interest rates out of cycle with the Reserve Bank, due to higher funding costs. With Westpac copping the brunt of the bad PR, it has now paved the way for other banks to follow, which could spell trouble for the residential property market leading into the spring selling season.

Westpac will lift all variable mortgage rates by 14 basis points from September 19. This will apply to new and existing customers as well as owner-occupiers and investors.

Westpac’s consumer banking division chief executive George Frazis said the bank is trying to counter the rising cost of funding, adding that rates are unlikely to be cut in the foreseeable future.

“This is a tough decision but we have a responsibility to price our mortgage products in a way that reflects the reality of our funding costs.

“Wholesale funding is an important component in our mortgage pricing. In particular the bank bill swap rate, which is a key wholesale funding rate for mortgages, increased by about 25 basis points between February and March this year and has remained elevated.

“We initially hoped that this increase would be temporary, and therefore we have incurred these costs over the last six months. The rate changes announced today will not recover these costs.

“We now believe wholesale funding costs will remain high for the foreseeable future.”

Ratecity research director Sally Tindall said the 14 bps hike will add an $35 extra per month and $420 per year on a $400,000 loan.

For a $1 million loan size, repayments will cost an additional $87 per month or $1,044 a year.

Westpac rate hike impact

Loan size Extra monthly repayments Extra yearly repayments
$300,000 $26 $312
$400,000 $35 $420
$500,000 $43 $516
$1,000,000 $87 $1,044

Tindall predicts Westpac had held out longer than the market expected before caving into the pressure to hike rates.

“Now that Westpac has hiked, taking the brunt of the bad PR, we expect the other three banks to follow suit.” Tindall predicted.

AMP Capital chief economist Shane Oliver also expects the other major banks to follow due to rising funding costs.

“The big four banks had hoped this cost of funding problem will go away but they haven’t.

“Costs remain elevated, so I am surprised they have held out for this long.

“I am also surprised that Westpac has decided to increase the rate broadly across all products. I was expecting they would exclude owner occupiers and focus on investors.

“It is easier to charge investors higher rates because they can claim it on tax. But an owner occupier can’t do that,”

Oliver said whilst the rate hike was only 14bps, it does create uncertainty that further out of cycle increases are around the corner.

“You can call this a de-facto interest rate rise. The good news is, the RBA is unlikely to raise the official cash rate until 2020.

“But this will be a negative for the residential property market,” he added.

“The auction market is already weak, and I expect it will weaken further.

“There is a risk that auction clearances will fall to the low 40s (percent).” Oliver warned.

Australian Property Journal

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