Mortgage pricing competition might hurt challenger banks

Mortgage pricing competition might hurt challenger banks
Mortgage pricing competition might hurt challenger banks

Challenger banks may be impacted by "ultra-competitive mortgage pricing" as lenders struggle to cope with rising demand for loans amid rising funding and regulatory costs and pressure on profits.

A warning came through from Bendigo and Adelaide Bank managing director  Mike Hirst, who said rates needed to return to levels that "reflect the current market funding and capital costs”, according to a report in the Australian Financial Review.

With the big four banks — Commonwealth, Westpac, ANZ and NAB — raising home loan rates for both investors and owner occupiers, smaller lenders are seeing a surge in borrower applications and struggling to meet demand.

Adelaide Bank announced an increase in its deposits for residential investors from 10 per cent to 20 per cent on top of the 25 basis point increase in costs for investor loans.

"As has been well telegraphed to all Australian authorised deposit-taking institutions, there is an expectation that as lenders, we must manage within the regulator's 10 per cent growth speed limit for investor loans,” Hirst was cited as saying by Fairfax Media.

Another lender to announce a change in its lending rates was AMP Bank, the Australian Broker reported.

The bank is raising variable interest rates for interest-only loans for existing customers by 15 basis points for owner-occupied loans and 28 basis points for investment loans from April 3.

In addition, effective March 31, 2017 for new customers and April 3, 2017 for existing customers, owner occupied principal and interest variable rate loans will increase by 7 basis points. As a result, the AMP Bank Professional Pack owner occupied variable rate loan will increase to 3.92% p.a. for new customers for loans of $750,000 and above.

The lender is also encouraging customers with interest-only loans to switch to principal and interest repayments. It will waive the switch fee until June 30. 

Sally Bruce, group executive of AMP Bank, almost echoed Hirst, saying the bank’s rate decision reflects “wholesale funding costs, the need to maintain a balanced portfolio and the market environment”.

“We also want to encourage customers to move to principal and interest repayments where it’s appropriate, as there is a great opportunity to access lower interest rates and repay your loan faster,” she was quoted as saying.

Teachers Mutual Bank, Unibank and Firefighters Mutual Bank are also increasing owner-occupier fixed rates from one to five years by 7 basis points. It applies to interest only and principal and interest.

For example, the interest rate on a one-year principal and interest loan for an owner occupier will rise from 3.77 per cent to 3.84 per cent. For five years the rate will rise from 4.54 per cent to 4.61 per cent.

Investor rates for the same borrower will respectively increase to 4.14 per cent and 4.91 per cent over the same terms.

Last May, Teachers Mutual Bank and Unibank were among the first lenders to slow growth on investor loans to meet the financial regulator, the Australian Prudential Regulatory Authority’s 10 per cent annual cap on investor loan growth. 

The banks, which have more than $6 billion in assets and 180,000 members, also recently withdrew from new investment lending to reduce annual growth from about 15 per cent. It was not available for comment.

"The changes to our fixed rate home loans represent the first changes to these rates in 2017. They reflect the changing market conditions for interest rates, both domestically and internationally,” said a bank spokesman. 

MyState, the listed financial services group, is also set to raise the rate for existing residential investors by 28 basis points.

Last Friday, property investors with interest-only loans from Commonwealth Bank of Australia were hit with the second interest rate rise in six weeks.

It follows earlier increases from ANZ Banking Group, Westpac Bank Corp and National Australia Bank and comes despite the Reserve Bank of Australia holding the official cash rate steady last week.

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