Here is a summary of key points about how major banks in Australia have been increasing home loan interest rates for new borrowers at a faster pace than the Reserve Bank’s official cash rate increases. Here are the key points:
● Interest Rate Increases: The major banks have raised the interest rates offered to new customers on basic home loan products by 0.32 percentage points more than the Reserve Bank’s official rate increases since the beginning of the year. This marks a significant change from the previous year when rates increased by an average of only 2.77 percentage points, which was 0.23 percentage points less than the central bank’s rate rises.
● Shift in Strategy: Last year, banks engaged in aggressive mortgage discounting to grow their loan books, but they have since been focused on recouping margins to bolster earnings. This change in strategy is affecting mortgage holders, who are now paying significantly more on their loans.
● Impact on Borrowers: Mortgage-holders are facing higher costs, with those holding a $1 million loan paying an additional $29,200 per year since the Reserve Bank started raising rates in May of the previous year.
● Margin Management: The banks appear to be prioritizing margin management over volume growth in the mortgage market over the past six months. This trend is expected to continue in the coming months.
● Pressure on the Reserve Bank: The higher mortgage rates and reduced competitive intensity, along with the end of cashback offers by most big banks, are expected to relieve pressure on the Reserve Bank, which may decide to leave the cash rate unchanged.
● Bank Investors: Higher rates are seen as welcome news for bank investors who had been concerned about eroding profitability due to writing new loans at ultra-competitive prices.
● Macquarie’s Analysis: Analysts from Macquarie noted that earnings expectations for major banks had improved, leading institutional investors to close underweight positions and drive share price outperformance.
● Rate Increases Continue: ANZ recently raised the rate on its basic variable home loan by up to 0.15 percentage points, indicating that the trend of out-of-cycle rate increases for new customers is ongoing.
● Differential Rate Increases: Commonwealth Bank (CBA) has raised rates for new customers at the fastest pace, with its advertised rate for the CBA Extra product increasing by 1.52 percentage points this year, compared to the Reserve Bank’s 1 percentage point increase in the cash rate during the same period.
● Future Outlook: The article suggests that the medium-term outlook for banks may depend on how earnings downgrades compare to the broader market and the economic outlook.
In summary, major banks in the country are increasing home loan interest rates for new borrowers at a pace that exceeds the Reserve Bank’s official rate hikes, shifting their focus from aggressive growth to margin management and profitability. This has implications for borrowers, investors, and the central bank’s monetary policy decisions.