Commonwealth Bank raises rates for interest-only loans

The country’s largest lender, Commonwealth Bank, has raised rates for interest-only home loans while reducing owner-occupier principal and interest variable rates.

Variable interest only home loan rates for owner-occupiers and investors will increase by 30 basis points. 

The bank said in a media release that the move to raise interest-only loan rates was “to meet our regulatory requirements”.

CBA followed its rivals by lifting rates for customers who opt for interest-only repayments while offering a small reward to home owners paying down their debt.

For owner-occupiers standard variable rate for those repaying principal and interest there will be a reduction of three basis points to 5.22 percent p.a.

The rates are effective from July 7.

Around 80 per cent of owner-occupier customers are repaying principal and interest, and these changes can help these borrowers own their home sooner, said the bank. A customer with an average mortgage of $350,000 will save $78 a year.

Owner-occupiers paying interest-only will pay an extra $88 a month or $1,056 a year, while investors paying interest-only, will pay CBA an extra $87 a month, or $1,044 a year.

Comparison website RateCity.com.au CEO Paul Marshall said there is now nowhere left to hide for Big 4 mortgage holders paying interest-only.

“The big banks have unanimously decided to hike rates for both new and existing customers despite the fact APRA’s most recent cap on interest-only was for new lending.”

“We are supportive of the banking regulator’s moves to manage the level of growth and resiliency in the housing market,” said a CBA release.

RBA had noted in its latest Financial Stability Review that interest-only loans account for a sizeable and growing share of total housing credit in Australia and such lending could increase households’ vulnerability in part due to the higher average level of indebtedness over the life of an IO loan compared with a regular principal-and-interest loan.

“If you’re an investor who wants to keep paying interest-only, your only reprieve from relatively high rates will be switching to a smaller lender,” said RateCity’s Marshall.

“Right now there are still a couple of investor rates offering interest-only terms under 4 per cent, but they’re earmarked as dying breed.”

Meanwhile, Matt Comyn, group executive of Retail Banking Services at CBA, added that the changes also “help us keep the right balance in our home loan portfolio, in line with what our regulators require”.  

All the major banks have been nudging customers with interest-only payments to switch to principal and interest repayments. 

These interest only changes are not in response to the bank levy that was announced as part of the Federal Budget in May, CBA said.

However, Marshall said that while owner-occupiers paying down their principal would welcome the reduction, the cuts weren’t exactly stacking up with the hikes.

“We would challenge the big banks to pass on more of the savings to mortgage holders who are doing the ‘right’ thing by paying off their loan,” he said, adding borrowers could try to shift to a smaller lender with more competitive rates.