A Rate of interest charged on a mortgage is commonly known as a mortgage rate. The mortgage rates are very sensitive to the market conditions and can rise and fall with an interest rate cycle and in turn could also affect the housing market.
The Australian Big four banks including National Australia Bank Limited (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and Australia and New Zealand Banking Group Limited (ASX: ANZ) account for more than eight in ten of the nation’s mortgages; and given the rising funding costs, these majors are expected to raise rates this year as well. Big lenders can no more afford the rising cost of their residential loan books which comprise of 55 percent of their total loan portfolios.
Around 8 Basis Points rate hikes are expected across the residential products with more rise expected to take place in the interest-only investor loans. Already struggling with record levels of debt as the average debt to income tops 200 per cent, this will increase financial stress on many household budgets. Major banks have also been receiving warnings about their lending practices from witnesses at royal commission and are under pressure already over out-of-cycle rate rises. It was noted that ANZ raised variable rate of investor loans by 25 basis points to 5.85 percent, last year.
Short term lending have spiked to three times higher the historical averages or around 60 basis points increasing the funding of mortgage portfolios. With lose of tolerance to absorb the impact of rising funding costs on net interest margins, five lenders have recently announced the mortgage rates of up to 40 basis points amid warnings. This has drilled down to the fact that even smaller banks have set to follow a short term money market benchmark interest rate, a rise in 30 and 90-day bank bill swap rate. This is correlated to heightened pressure on their ability to provide lending and fixed saving rates while being competitive and attractive. For instance, a 15 basis point rise is flagged by Bank of Queensland in variable home loan rates for interest-only category.
What allows the property owners to use equity is the lines of credit and hence this rate is increased by lenders, Investor and owner-occupier lines of credit are increased by 10 per cent. Other lenders including IMB and Auswide, Suncorp and ME Bank are some of the lenders to have recently increased the rates.
Largest banks hiked mortgage rates for speculative buyers to bring down the heated housing market as part of intensifying campaign by regulators. These hikes started coming in after a long haul of many months when the central bank held rates steady. Bank lending is supposed to get stricter as the main authority, the Australian Prudential Regulation Authority (ARPA) is set to tighten it. The banks seem to have already responded with rate hikes on investment loans and particularly interest only loans favored by speculators.
Thus, the rising cost of money is impacting the way banks operate and the banks now prepare to changes to manage the costs after absorbing the same for some time for now. This is indicative of the possibility of having prepared the households for interest rate environment to witness a rise at global level.
