Eight months on and the worsening liquidity crisis is crippling the profitability of mortgage lending.
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 – however only a fraction of these costs have so far been passed on to borrowers.
“New loans in general are being written at rates that are less than the combined cost of funds and operating costs,” he said.
It is 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, that are responsible for the increased funding cost for lenders.
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.
In the five months to December 31 2007 Australia’s top mortgage lender CBA said it absorbed around $100 million of increased costs to protect its borrowers – which it continues to do so.
“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.
However 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 second largest mortgage lender – increased rates for new tracker deal mortgages last week by more than 50 basis points.
Earlier this year significant political pressure was applied to the major Australian banks to minimise interest increases above the RBA rate. But the rhetoric has changed with the realisation that bank share values may slide if profitability is damaged.
Challenger’s Steve Weston believes that Australian lenders have to pass on more of the 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,” said Mr Weston.
“If the banks feel unable to increase their lending rate to reflect the higher cost of funding we will see lenders move to credit rationing.
“This could have a severe impact on the economy so 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.
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