- Moody’s Investor Services says recent out-of-cycle mortgage rate increases from smaller Australian lenders could potentially lay the foundation for the big 4 banks to follow suit.
- It says higher wholesale funding costs and slower loan growth are behind recent mortgage rate increases.
- Moody’s does not expect higher mortgage rates to lead to a noticeable increase in bad housing loans.
Facing higher wholesale funding costs and slower loan growth, an increasing number of small and medium-sized Australian lenders have announced out-of-cycle mortgage rate increases in recent months.
As seen in the chart below from Moody’s Investor Services, more than a few have bumped up mortgage rates on variable rate loans with some increases larger than others.
However, in contrast to what has been seen in the past, none of Australia’s big four bank’s have followed suit, at least not yet, possibly reflecting a differing funding mix compared to smaller lenders as well as caution during Australia’s Banking Royal Commission.
But Moody’s thinks that may not remain the case for long.
“Given the four major banks have traditionally been the first-movers on headline home loan rates, we see smaller lenders’ willingness and ability to increase rates as credit-positive evidence that they retain pricing power independent of the current challenges confronting the major banks,” it says.
“Moreover… the rate hikes by the smaller banks may be paving the way for the major banks to raise their rates and preserve margins, despite the politically charged environment.”
While that will squeeze household finances further, and more broadly, should they too lift mortgage rates independent of the RBA, Moody’s isn’t concerned that recent moves will lead to a noticeable lift in bad housing loans.
“Despite the very high level of household leverage in Australia, we do not expect the current round of home loan rate moves to cause a material increase in loan delinquencies or credit costs,” it says.
“That is because labour market conditions, which are a strong indicator of mortgage performance, are likely to remain favourable, underpinned by solid economic growth forecasts, trade tensions notwithstanding.”
It also notes that recent increases in home loan rates are “small compared with the buffer built into home loan serviceability assessments”.
“Australian banks commonly assess borrowers’ repayment ability based on a minimum interest rate of 7.25%, which is well above the average home loan rate of around 5.25% posted by Australian banks over the past three years,” it says.