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Get ready for some pain. Your mortgage could rise

Home borrowers hanging out for lower rates on their mortgages are likely to be disappointed, even if the Reserve Bank cuts official rates again this year.

The reason is the major banks – NAB, Westpac, ANZ and Commonwealth – are not likely to pass on the full benefit of any further official rate cuts for some time.

In fact, several commentators are arguing that the big banks may decide not to pass on any savings to borrowers of future RBA rate cuts before the middle of next year.

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The introduction of new capital rules by the Australian Prudential Regulation Authority (APRA) will require the major banks and Macquarie Bank to put aside more cash reserves for every dollar they lend out to home borrowers.

At the moment, the major banks have to stump up about $1.70 for every $100 they lend to meet the APRA capital standard for home lending.

However, under the new capital rules that requirement will rise to around $2.40 for every $100 lent.

While the new rules do not take effect until July next year, the higher capital requirements will be applied to more than $1 trillion worth of mortgages already lent out by the banks to homebuyers.

On this basis, the four major banks will have to find more than $10 billion just to maintain the current profitability of their home lending divisions.

The banks have already moved to recoup some of this from investment borrowers after they raised fixed and variable rates on investor home loans last month.

Here’s a brief list of those pricing changes:

ANZ
• Fixed rates up 0.4 per cent for new borrowers
• Variable rates up 0.27 per cent to 5.65 per cent

CBA
• Fixed rates increased by up to 0.4 per cent
• Variable rate investment loans up 0.27 per cent to 5.72 per cent

NAB
• Variable rate interest-only loans up 0.29 per cent

Westpac
• Fixed rate loans to rise by as much as 0.3 per cent
• Variable rate investment loans rose 0.27 per cent to 5.72 per cent

Are owner-occupiers in line for increases?

Leading analysts are suggesting that the major banks will soon move to hike rates on owner-occupier mortgages.

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Is it time to worry about your mortgage debt? Photo: Shutterstock

Bank shares have rallied in recent weeks on market expectations that they will recoup most of the cost for meeting the new APRA rules by slugging borrowers on rates.

This has eased the concerns of nervous investors who would be big losers if the banks decided to raise most of the extra regulatory costs by issuing new shares.

Major bank stocks have risen by up to six per cent since senior executives signalled last month that they planned to raise mortgage rates.

At some point in the next nine months owner-occupiers are likely to see their mortgage rates go up by as much as 0.3 per cent.

The new capital rules were recommended by the Murray Inquiry to make the Australian financial system safer in the event that borrowers find it difficult to meet repayments.

But the banks have chosen to make borrowers bear the lion’s share of the capital reforms.

Can the RBA stimulate the economy, right now?

An implication of APRA’s new capital rules is that they have potentially rendered monetary policy impotent in the near term.

Reserve Bank of Australia

The RBA is expected to keep official rates on hold in August.

Even if the Reserve Bank thought it was necessary to cut the official cash rate in the next few months to support economic growth, it is very unlikely that the major banks would pass on the savings to home borrowers.

Most economists are expecting the RBA to keep official rates on hold at its August board meeting, but they question whether another one or two official cuts would have much impact on the economy.

“The RBA’s main policy instrument is monetary policy and they are always keeping an eye on what the stimulatory effect on the economy would be if they were to reduce the cash rate,” said leading economist Stephen Koukoulas.

“This could be a huge issue if the Australian economy doesn’t recover from the collapse in commodity prices.

“If the RBA decided to loosen monetary settings to stimulate a weak economy and the banks did not respond, the central bank wouldn’t be happy.”

Under such a scenario, monetary policy would be seen to have no effect on the behaviour of 85 per cent of the Australian banking system.

Small lenders not affected by APRA reforms

The new capital rules only apply to the major banks and Macquarie Bank.

If you have a residential home loan with one of the regional banks, a credit union or a non-bank lender, the rate on your mortgage should not be affected by the APRA reforms.

There are already signs that a significant price difference between the major banks and smaller lenders is now embedded in the mortgage market.

As the majors increase mortgage rates on flagship products their competitive position in the market will weaken further.

This could trigger a wave of home loan refinancings where borrowers try to move their home loans out of the big banks to price-leading lenders.

Canstar spokesperson Justine Davies believes loan switching could accelerate if official rates begin to rise.

“People could get better deals if they shopped around right now, but I’m sceptical that they will take action until official rates start to increase,” she said.

“Because we’re in a low interest rate environment people become complacent that they’re getting a good deal.”

The following table supplied by Canstar shows the average rates on owner-occupied home loans in the Australian mortgage market at the end of July.

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