CBA and ANZ have both followed Westpac’s lead by raising their mortgage interest rates out of cycle, leaving all eyes on NAB to see if it will follow suit.
On Thursday (6 September), the two banks announced that they will increase interest rates on their owner-occupier and investment home loan offerings, following Westpac’s 14 basis point hike a week earlier.
The Commonwealth Bank of Australia (CBA) will lift rates on all of its variable rate home loan products by 15 basis points from 4 October, while ANZ will increase interest rates on its variable owner-occupied and investment home loans by 16 basis points from 27 September.
That was despite the Reserve Bank leaving official rates on hold again in September at their record low of 1.5 per cent.
The banks have cited a “sustained rise in wholesale funding costs”, with ANZ adding that its decision followed a “consideration of business performance and market conditions”.
For example, George Frazis, Westpac’s chief executive, consumer bank, said in a statement that the decision was largely influenced by a rise in wholesale funding costs.
“This is a tough decision, but we have a responsibility to price our mortgage products in a way that reflects the reality of our funding costs.
“Wholesale funding is an important component in our mortgage pricing. In particular, the bank bill swap rate, which is a key wholesale funding rate for mortgages, increased by about 25 basis points between February and March this year and has remained elevated.”
Mr Frazis added that despite initially expecting funding pressures to ease, the bank now expects such pressures to persist in the longer term.
“We initially hoped that this increase would be temporary, and therefore, we have incurred these costs over the last six months. The rate changes announced today will not recover these costs,” the chief executive said.
“We now believe wholesale funding costs will remain high for the foreseeable future.
“Given the step change in our funding costs, we have made what we believe is the appropriate decision: to balance the interests of all of our stakeholders by remaining both unquestionably strong and competitive in the market.”
Likewise, CBA’s Angus Sullivan, group executive, retail banking services, commented: “We have made this decision after careful consideration. We are very conscious of the impact that increasing interest rates will have on our customers; however, it is important that we price our home loan products in a way that reflects underlying costs.
“Over the past six months, we have seen funding costs increase significantly, driven primarily by a rise in the 90-day bank bill swap rate. These changes have increased the cost of providing loans to our customers.
“We have absorbed these higher funding costs over the past six months in the hope that they would ease. Unfortunately, the costs have remained high and it is now expected that they will remain elevated for the foreseeable future.”
Mr Sullivan added: “As a result of this, we have made the decision to raise our variable home loan rates to partially offset the increased costs. We understand this will have an impact on household budgets. To allow our customers time to prepare, this change will not take effect for four weeks, giving home owners an opportunity to look at their options.”
Meanwhile, ANZ’s group executive, Australia, Fred Ohlsson, said: “This was a difficult decision given we know the impact rising interest rates have on family budgets. The reality is it is more expensive for us to fund our home loans on wholesale markets and we also needed to balance the needs of all stakeholders.
“There is no change to the effective rates of our home loan customers in drought-declared regional Australia, benefitting more than 70,000 of our customers.
“We wanted to play our part in keeping cash in regional towns impacted by the drought and we hope this will also assist both families and small businesses in these areas.”
NAB is the only big four bank that is yet to announce out-of-cycle rate increases, and it is widely expected to follow its rivals in raising its variable rates in due course, too.
The banks’ decisions to raise rates have been questioned by the new Treasurer, Josh Frydenberg, who commented recently that it was his view that the banks “explain to the Australian people” why they have lifted rates.
“Any financial institutional which makes these decisions needs to explain to its customers why,” Treasurer Frydenberg said earlier this week.
The way the major banks price their mortgages has been under scrutiny in the past year, with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry looking at mortgage rates.
The Australian Consumer and Competition Commission (ACCC) was earlier this year granted an extension to its inquiry into how the banks affected by the Major Bank Levy explain any changes or proposed changes to fees, charges or interest rates in relation to residential mortgage products. The inquiry relates to prices charged until 30 June 2018.
A final report is expected by 19 November 2018.
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.