Credit Crisis To Dent Australian Mortgages

The Age

Saturday January 5, 2008

Vanessa Burrow, Markets Reporter

THE GLOBAL credit crisis has finally arrived on the doorstep of the average Australian, with most home owners almost certain to pay more interest on their mortgages.

Financial analysts expect Westpac, Commonwealth Bank and ANZ to follow National Australia Bank, which this week raised its standard variable interest rate because of higher funding costs. "I would expect other banks to follow," said Deutsche Bank analyst Victor German. He and his colleagues believe the major banks' earnings have been cut by 2-3% because of the shortage of credit set off by huge defaults in the US subprime mortgage market.

"A 10-basis-points rise (0.1 of a percentage point) in the standard variable mortgage rate would be required to neutralise this negative impact," the researchers said. But increases are expected to exceed 10 basis points, with some banks saying funding costs have increased by about 30 basis points.

National Australia Bank, Australia's second-biggest home lender, has increased its standard variable rate from 8.57% to 8.69%.

Although it did not reveal its mix of loans, market estimates suggest about 80% of mortgages are variable and 20% fixed. Most banks also offer discounts on their standard variable rate that often extend for the life of the loan.

The national corporate affairs manager of Mortgage Choice, Warren O'Rourke, said he expected further rate rises that were not tied to official increases by the Reserve Bank.

"I think the fact that NAB has gone does potentially make it easier to follow," he said. "The other banks have already been out in the marketplace saying that at some point in time, given their current cost profile, that they will have to look to increase rates."

During the worst of the credit crisis, interbank lending rates soared, which meant banks had to pay more interest on loans from other banks.

Since then, Australia's benchmark three-month lending rate has relaxed and is at 7.145%, well below its November 29 peak of 7.315%.

A spokesman for Commonwealth Bank, Australia's biggest home lender, said the bank took into account "all factors when reviewing the cost of funding" and its position on interest rates. But a spokeswoman for NAB said the bank expected "ongoing volatility" in credit markets.

ANZ's Paul Edwards said the elevated interest rate environment, associated with global credit issues, had dragged on since August to become a medium-term issue.

"So, it's inevitable there's going to be a flow-on to variable rates," he said.

Yesterday, ANZ increased its one, three, four and five-year fixed interest rates by 25 basis points, or a quarter percentage point, to 8.54%.

Mr Edwards said the timing and amount of any change to the standard variable rate was still under review. A spokesman for Westpac, which yesterday completed its acquisition of the RAMS Home Loans franchise distribution business, also said rates were under review.

Together, the Big Four banks account for almost 70% of Australia's mortgage lending market. St George Bank accounts for almost 9%.

Meanwhile, Anglicare Victoria urged the main banks to consider the impact of another rate rise on low-income families, suggesting the additional burden might plunge some into crisis.

But Mortgage Choice's Mr O'Rourke said most people viewed property as a long-term investment and would still be keen to enter or remain in the market.

"We conducted a survey in mid-November and one of the questions we asked was: 'Where do you think interest rates will go in 2008?'," he said.

"About 93% from Victoria basically said that they expected an official interest rate rise in the first quarter of 2008.

"They were already factoring in an increase themselves, so they would have adjusted the household budget to accommodate that."

© 2008 The Age

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