Rate pressure on banks

THE Commonwealth and National Australia banks must hike interest-only home loan rates again or be inundated with a flood of higher-risk borrowers, industry experts says.

Investors will likely flock to the two lenders after Westpac yesterday joined ANZ in lifting variable interest-only rates for investors beyond 6 per cent, they say.

Westpac yesterday announced it was lifting its rate 0.34 percentage points to 6.3 per cent while trimming its standard rate for owner-occupiers who repay their principal.

It follows a similar move by ANZ earlier this month, which charges 6.26 per cent to investors who pay interest only.

Their moves come after the Australian Prudential Regulation Authority in March instructed banks to limit interest-only loans to 30 per cent of mortgage lending.

At the time, the run rate was about 40 per cent.

Westpac’s rate was still in the high 30s and the bank acted to take heat out of its interest-only mortgage book, the

Bulletin believes. The bank has cut its standard variable rate for owner-occupiers paying principal and interest by 0.08 percentage points, to 5.24 per cent. Its changes take effect on June 30.

ANZ’s standard rate for those customers is 5.2 per cent.

“If Westpac didn’t move, they would start to get the flow of (higher-risk) customers,” a banking source said.

Pressure would now build on NAB and the CBA, insiders said. Those banks have interest-only rates for investors below 6 per cent, at 5.9 per cent and 5.94 per cent respectively.

“They probably need to move above 6 per cent as well,” one source said.

It is understood APRA has become more demanding in recent weeks, with the banking regulator making clear the 30 per cent rate is a “hard” target.

Banking sources last night said differential pricing – where investors and interestonly customers pay higher rates – was already working for the sector, with tens of thousands of borrowers moving from interest-only to principal-and-interest loans in recent months.

Shares in the major banks all fell yesterday after they were downgraded by Moody’s Investors Service late on Monday.

Moody’s analysts cited the high level of household debt in Australia that had resulted from soaring house prices in Melbourne and Sydney.

Moody’s noted the high volume of investors in the market.

“Rising house prices during 2013-17 have been accompanied with an elevated proportion of lending to residential property investors, raising some concerns over the negative impact on financial stability,” the ratings agency said.