Monday, March 03, 2008

Consider yourself lucky if your mortgage rate only goes up 0.25 per cent

Australia’s big banks are weighing up whether to lift their variable mortgage rates by more than the 0.25 per cent increase expected to be delivered by the Reserve Bank on Tuesday.

The Reserve Bank board will meet from 9.30am Tuesday and announce its decision about interest rates at 2.30pm.

It is expected to lift its so-called cash rate by a further 0.25 per cent - the fourth such increase in eight months - taking the rate to 7.25 per cent, a 13-year high.

But private banks including the Commonwealth, ANZ and Westpac are considering adding an extra increase on top of the 0.25 per cent, taking the total hike to perhaps as much as 0.4 per cent.

Such a hike would add a further $100 per month to the cost of repaying a $400,000 loan...

That would be on top of increases so far totaling $225 per month in the past

The private banks need to boost their rates by more than the 0.25 per cent
to be mandated by the Reserve because their costs have soared in recent

Just three weeks ago Australia’s major banks were paying wholesale rates of
7.25 per cent for the money they lend for housing. Those rates have now
exploded to around 8.0 per cent, meaning that the banks are now losing
on each new home loan they write.

An analyst employed by one of the major banks told the Canberra Times that
in order to be sure of returning to profit the banks should lift their
mortgage rates by as much as 0.8 percentage points.

But he said none of the banks were game to announce such a big increase and
all hoped the wholesale rates retreated.

“If the banks think these high wholesale rates are going to hang around
rather than be just a short-term blip they will be more inclined to raise
their mortgage rates, but all of them expect wholesale rates to come back at
some point. It’s a question of the timing,” he said.

The Treasurer Wayne Swan yesterday expressed sympathy for the Australians
about to be hit by the next rate rise but said he could not prevent it.

“I don't comment on possible decisions of the Reserve Bank. My job as
Treasurer is to support the Bank by putting as much downward pressure on
inflation as I possibly can and unfortunately at the moment underlying
inflation is at a 16 year high. That was the parting gift of the Liberal
Party of Australia to the people of Australia,” he said.

Asked whether unemployment would climb substantially as a result of the
coming interest rate hikes and spending cuts he had planned for the May
budget the Treasurer said it would not.

“The economy may slow a lot but I have no advice from the Treasury that
suggests that unemployment will increase substantially,” Mr Swan said.

The analyst who spoke to the Canberra Times said none of the big banks
wanted to be the first to lift its rates in excess of what the Reserve Bank
mandated, but each wanted another bank to go first.

“Look at the backlash the Commonwealth Bank had. It had the lowest increase
when it widened its rates in January, so in February had another go to catch

“It copped a huge amount of flack on talkback radio and the Treasurer Wayne
Swan attacked it.”

“It’s a big brand issue for the banks. There will be a lot of game theory
at work with each trying to call each other’s bluff on who moves first."