Australian lenders must pass on rising funding costs to consumers or risk pushing the mortgage market into a credit rationing cycle, warns Challenger’s general manager for mortgages Steve Weston.
According to Mr Weston, funding costs for lenders have risen by as much as 1.4 per cent – but only a fraction of these costs have been passed on to borrowers to date.
“New loans in general are being written at rates that are less than the combined cost of funds and operating costs,” he said.
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Mr Weston said to maintain profitability Australian lenders will be forced to pass on higher funding costs to borrowers.
“At the end of the day shareholders of the various lending organisations will demand a return on their capital – and if you’re writing mortgages underwater there is no commercial return,” he said.
Dramatic rises in the Bank Bill Swap Reference Rate (BBSW) – a daily calculation of the yields on bank bills – and an increase in credit spreads, rather than the RBA cash rate, are being blamed for lenders’ increased funding costs.
While banks have access to funds via deposits, they are still dependent on offshore markets for funding the majority of their mortgages, as are securitised non-bank lenders.
Australia’s top mortgage lender CBA said it had absorbed around $100 million of increased lending costs in the five months to December 31 2007.
“Since August 2007, all banks have seen a significant increase in the cost of borrowing funds from offshore,” a CBA spokesperson told Mortgage Business.
“The Commonwealth Bank is continuing to protect its customers from the full impact by absorbing some of the increased costs,” the spokesperson said.
But the bank conceded that the future direction of interest rates “will depend on what the position is in the global market and the cost that banks experience in obtaining funds”.
The strain of higher funding costs is already apparent in overseas markets. In the UK, Nationwide Building Society – the country’s second largest mortgage lender – recently increased rates for new tracker deal mortgages by more than 50 basis points.
Earlier this year, the Federal Treasurer applied significant political pressure to the major Australian banks to minimise interest rate increases above the RBA rate.
But the rhetoric has changed with the realisation that bank share values may slide if profitability is damaged.
Mr Weston said the potential impact on the economy was responsible for the turn around.
“...right now we’re seeing a softening in political pressure being applied to lenders who pass on mortgage rate increases in addition to the RBA increases,” said Mr Weston.
Mr Weston said banks that felt unable to increase their lending rate to reflect the higher cost of funding were likely to move to credit rationing.
