Westpac may lose customers with mortgage rate rise
Will the other banks follow Westpac and raise their owner occupier mortgage rates as well, and how can smaller lenders take advantage?
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One bank raising interest rates may not seem like such a big deal, but Westpac's decision to jack up variable mortgage interest rates on Wednesday is more significant than it may appear. Here's why.
1. Hundreds of thousands of borrowers will face higher costs
Westpac does not say exactly how many customers will be affected by its actions, but hundreds of thousands of borrowers will pay more in interest as a result. On a $500,000 loan, monthly interest costs will increase by $63 a month. The bank says the impact is less than $10 a week for a typical customer.
Unlike previous changes this year, this move will affect both owner-occupiers and investors. For owner-occupier customers, it is likely to be the first time interest rates have increased since the Reserve Bank last raised official interest rates in late 2010.
The rate rise will only apply to Westpac-branded loans, not those with St George or Bank of Melbourne, where rates are under review.
2. The Reserve Bank may be more likely to cut official interest rates
Some experts argue one reason the Reserve Bank has not cut interest since May, even though the economy is weak, is its concern of fuelling a housing bubble.
If Westpac's move is copied by other banks, it could take some of the heat out of the housing market, relieving these concerns. Market bets of an RBA cut next month have increased after Westpac's decision.
3. It may slow the property market
Westpac's decision to target owner-occupiers, as well as investors, could slow down home loan growth, which has been fingered as one reason for strong house price growth in Sydney and Melbourne.
In recent months there has already been a significant slowdown in new lending to investors, who were previously driving much of the growth in Sydney.
4. There could be more rate rises to come
The bank blamed its decision on tougher regulations, which are being implemented to make banks more resilient to any future shocks.
But these rules are still evolving, as regulators around the world seek to prevent future carnage seen in the global financial crisis. Some analysts predict regulators will further increase global bank capital requirements, a cost Westpac says customers should also wear.
5. It will test competition in banking
The major banks watch each other very closely when setting interest rates. Their reaction to Westpac's move should tell us more about the state of competition in the $1.3 trillion mortgage market.
Credit Suisse analyst Jarrod Martin says the banks have only passed on about a third of their extra capital costs to customers so far. He says that whether they decide to follow Westpac will be a "key test" of the "oligopoly pricing structure," which is an important influence on bank profits.
READ MORE:
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