Westpac’s out-of-cycle mortgage rate hike is a “game changer”, experts say, with the rest of the big four now expected to follow suit.
Australia’s second biggest lender announced on Wednesday that it will increase all variable mortgage rates for owner-occupied and residential investment property loans by 14 basis points, or 0.14 percentage points, from September 19.
The bank cited “sustained increases” in the cost of wholesale funding as the reason for the increase.
Westpac consumer bank CEO George Frazis said the bank believed wholesale funding costs would remain high for “the foreseeable future”.
Westpac’s standard variable home loan rate for owner-occupiers will rise to 5.38 per cent for customers with principal and interest loans and 5.97 per cent for those with interest-only loans.
Investors with residential property loans will see their rates rise to 5.93 per cent for principal and interest loans, and 6.44 per cent for interest only.
‘This is a really big move’
Westpac’s announcement ended the waiting game to see which of the big four banks — which control around 80 per cent of Australia’s home loan market — would be the first to move.
Smaller banks are more vulnerable to international market rate rises than the big four, with many including Macquarie, AMP, Bank of Queensland, ME Bank and Suncorp, having already raised their variable rates in June and July.
But Westpac now has the dubious honour of being the first of the big four to raise rates out of cycle, flying in the face of the Reserve Bank’s decision to keep the official cash rate steady.
The RBA announced earlier this month that the official interest rate would remain on hold at 1.5 per cent, marking a record-breaking two years since Australia’s central bank last changed the cash rate.
“If we see an onset of out-of-cycle rate movements within the market, this may delay any change to the cash rate,” Finder money expert Bessie Hassan said.
“Considering there’s been no move for two years, 14 basis points is a large increase.”
Canstar financial services executive Steve Mickenbecker described Westpac’s decision as a “game changer”.
“We’ve had second-tier lenders moving their variable rate up. This is the first of the big guys to do it, and that flows through to their existing customers,” he said.
“This is a really big move.”
Public outrage at the misconduct revealed by the banking royal commission has made the big banks “reluctant” to raise rates despite shrinking profit margins, Mr Mickenbecker said.
“Westpac had a diminishing of their margin over the past six months. It’s not surprising that they’ve moved.”
Rate hikes by NAB, CBA and ANZ now appear inevitable.
“Westpac’s made that first move because someone’s got to take the heat, and if the temperature’s not too hot the rest will follow,” Mr Mickenbecker said.
“I’m sure they’d like to sit back and watch, but give it a day or two at most.”
Independent economist Saul Eslake agreed that negative public sentiment would have made the big banks “nervous” about raising rates, but that increased wholesale funding costs left them with little choice.
The rest of the big four are “more likely than not” to raise interest rates “sooner rather than later”, but not necessarily by the same amount as Westpac, he said.
Mortgage holders under strain
Mortgage holders may struggle to absorb the rate rises, CoreLogic Victorian state director Geoff White said.
“The bottom line is there are people that have extended themselves to buy property in recent years on the basis of low interest rates when the banks were in some cases throwing money at people and allowing people to potentially overcommit themselves,” Mr White said.
“They will be no doubt under strain with any increase of rates.”
Rising mortgage rates will be of particular concern to those in “the mortgage belt areas” of capital cities, Mr White said.
“Living costs are rising and wages and salaries are not being increased at the same rate, so people will find it extremely difficult.”
Widespread rate hikes may also put a dampener on the typically hot spring real estate season, Mr White said.
“Buyers at auctions will factor in the fact that rates have gone up, which could mean there’s an air of cautiousness, and buyers might not extend themselves.”