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Banks move on interest rates out of cycle

by Reporter6 minute read

All of the big four banks have announced changes to out-of-cycle interest rates in the last week, as lenders respond to pressure on funding costs and increasing investor appetite.

Commonwealth Bank was the last of the big four to announce changes, when it revealed on Friday (24 March) that it would be increasing interest-only investment home loans by 26 basis points to 5.94 per cent per annum, as well increasing owner-occupier interest-only rates by 25 basis points to 5.47 per cent per annum.

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The bank also revealed it would be increasing the SVR for principal and interest investment loans by 24 basis points to 5.80 per cent per annum, and increasing the standard variable rate for owner-occupier home loan customers repaying principal and interest to 5.25 per cent per annum.

The changes will take effect from 8 May.


Also on Friday, ANZ announced that it would be increasing variable interest rates for investors to 5.85 per cent from next Friday, while investors with interest-only home loans will see their rates rise to 5.96 per cent from 22 April, among other changes.

Effective from last Friday (24 March), Westpac’s variable interest rates for P&I and interest-only investment loans rose to 5.79 per cent and 5.96 per cent, respectively, and its SMSF investment property fixed rates (P&I) increased by up to 100 basis points.

Meanwhile, NAB’s variable rate for residential investment home loans also increased last week, rising by 0.25 per cent to 5.80 per cent per annum.

Other lenders have also followed suit, with non-bank lender Homeloans announcing that its Optima product rates were increasing and Bendigo Bank announcing a 25-basis point increase in its residential investment variable rate to 6.01 per cent from 31 March.

Investor demand in focus

The moves follow a spate of increases to investment loans in recent weeks, as banks increase their interest rates for investors in a bid to remain under APRA's 10 per cent speed limit, respond to “increasing funding costs” and mitigate any potential risks in lending to investors.

Bendigo and Adelaide Bank managing director Mike Hirst said the bank’s adjustments reflect the requirement to meet regulators expectations in dampening demand for investor lending and reflects the bank’s view that recent ultra-competitive mortgage pricing needs to return to levels that better reflect the current market funding and capital costs.

“As has been well telegraphed to all Australian authorised deposit taking institutions, there is an expectation that as lenders, we must manage within the regulator’s 10 per cent growth speed limit for investor loans,” Mr Hirst said.

“When setting these rates we’ve tried to carefully balance the interests of our mortgage customers, those who earn money through deposits and those who invest in our bank.”

According to the latest volume of JP Morgan's Australian Mortgage Industry Report, new capital requirements under Basel 4 could see property investors hit by rake hikes of up to 3 per cent.

Speaking in Sydney earlier this month, JP Morgan analyst Scott Manning said, "We have seen ongoing repricing of the back book and also some change in discounting behaviour. But one of the things that has also come through is the divergence in repricing behaviour.

“The mortgage repricing against the SVR product is around 30 basis points. But investor mortgages and, in some cases, interest-only loans have been twice that rate at 60 basis points.”

With risk weights for investor loans set to increase significantly, JP Morgan expects ongoing significant dispersion in pricing for mortgage products to continue.

“You could be looking at pricing responses here anywhere between 1.5 per cent to 3 per cent, which is quite meaningful when you consider that mortgage rates at the moment are around 4.5 per cent,” Mr Manning said.

Increasing investor appetite has led some analysts, such as Morningstar's David Ellis, to suggest that the prudential regulator could soon introduce additional macroprudential measures. 

In a research report on Commonwealth Bank of Australia (CBA) late last week, Morningstar analyst David Ellis said, “Increasing concerns of an overheating housing market are likely to prompt the Australian Prudential Regulation Authority, or APRA, to act to slow the rate of growth of residential investor home loans.

“Likely action, known as macroprudential controls, include the reduction in the current 10 per cent annual growth limit on residential lending to something around 5 to 7 per cent.”

Morningstar also warned that APRA could raise the minimum serviceability buffer “to 3 per cent from 2 per cent” and lift the risk-weighted capital floor for new residential investor borrowers holding multiple properties to 75-100 per cent.


[Related: ANZ primed for investor loan growth]


Banks move on interest rates out of cycle
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