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Westpac first big Australia lender to raise mortgage rates

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Westpac Banking Corp raised its key mortgage rate, the first of the nation's biggest banks to decide passing on higher funding costs is worth the risk of further reputational damage.

[SYDNEY] Westpac Banking Corp raised its key mortgage rate, the first of the nation's biggest banks to decide passing on higher funding costs is worth the risk of further reputational damage.

Its variable standard home-loan rate for owner occupiers will rise 14 basis points to 5.38 per cent, the Sydney-based lender said in a statement on Wednesday. The move reflects "a sustained increase in wholesale funding costs", the bank said.

Westpac shares extended gains after the announcement, to be up 3 per cent at 3.56pm Sydney time. Shares of the other big banks - Australia & New Zealand Banking Group Ltd, Commonwealth Bank of Australia and National Australia Bank Ltd - also climbed in late trade.

Short-term domestic funding costs reached a two-year high last quarter even as the central bank holds its benchmark rate at a record low 1.5 per cent. Australian banks, which are reliant on offshore borrowing to fund their loan books, are also facing higher costs overseas as the US Federal Reserve raises interest rates.

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"We now believe wholesale funding costs will remain high for the foreseeable future," said George Frazis, head of Westpac's consumer bank. "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."

Westpac said Aug 24 its net-interest margin - a key measure of lending profitability - fell last quarter, sending the shares to their biggest weekly loss in more than six years.

The increase in costs has come at an inopportune time for the big lenders, who are trying to restore their reputations in the wake of a series of scandals that led to a wide-ranging inquiry into misconduct in the financial sector, which in turn unearthed further wrongdoing. Resentment that a 2016 central bank interest rate cut wasn't fully passed on to borrowers helped stoke a sense banks were gouging customers, and fueled calls for the inquiry.

Higher mortgage rates may squeeze borrowers already struggling with stagnant wages growth and the highest levels of household debt among G-20 nations. The out-of-cycle increase could also further deflate the housing market by deterring investors, who have already been hit by lending restrictions and a 10-month drop in prices.

In other moves, Westpac raised: owner-occupied interest-only mortgages to 5.97 per cent, investor P&I loans to 5.93 per cent, and investor interest-only loans to 6.44 per cent.

While some smaller lenders have raised mortgage rates, Westpac is the first of the big banks to do so. In addition to funding costs, margins are also under pressure from increased competition, the necessity to invest more in technology and the slowing housing market. Today's increase will add A$35 (S$34.90) a month to the interest cost of an A$300,000 loan, Westpac said.

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