Homeowners hit by fixed rate hikes as bank financing costs rise

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Paying off your mortgage is getting more and more expensive, with Westpac becoming the latest of 17 banks to raise fixed rates this year.

Westpac, including subsidiaries St George, Bank of Melbourne and BankSA, raised interest rates for homeowners and investors by up to 0.2 percentage points on Friday.

The changes will add hundreds of dollars each year to average borrower repayments – and RateCity research director Sally Tindall said Westpac won’t be the last of the big four banks to raise rates in 2022.

“We expect other banks to follow in the days following sharp increases in the cost of wholesale funding,” Ms Tindall said.

“Mortgage holders who have been fortunate enough to lock in a record fixed rate over the past two years are sheltered from these hikes, but only for the duration of their fixed rate tenure.

“Anyone who stared at the start of the pandemic for two years should start thinking about what their next step might be. When they leave their fixed rate, they will look to a very different market. »

Ms Tindall said it made sense to prepare for future interest hikes by anticipating repayments now.

“The smaller your loan size when rates go up, the less pain you’ll feel,” she said.

Although Australians can expect further rate hikes this year, economists are divided on why.

Why are banks raising their rates?

Independent economist Saul Eslake said banks are raising fixed mortgage rates because bond yields associated with their funding costs are rising.

These yields are rising largely in response to expectations that the US Federal Reserve will raise interest rates after the country’s inflation hit a 40-year high in December.

Mr Eslake said Australian economists, banks and investors also believed the Reserve Bank of Australia (RBA) would be influenced by the US Federal Reserve and also raise interest rates, leading to higher variable rates. students.

Although Mr Eslake believes the RBA will chart its own course, he said it was understandable that banks would pass on increases in term funding costs to customers in the same way petrol stations pass on higher fees. crude oil prices on motorists.

But he said if the banks should Passing the costs on to borrowers was a “business decision” for bank management – ​​a decision that had to take into account the competing interests of its customers, its stakeholders and the effects on public opinion.

Commonwealth Bank’s head of fixed income and currency strategy Martin Whetton said banks were also raising rates because the RBA ended a pandemic funding facility in 2021 that gave them access to cheap money.

But he said he did not believe the actions of the US Federal Reserve affected the rate decisions of the RBA or the banks.

And while higher repayments may be bad news for borrowers, he said rising interest rates were a sign of a strong economy.

“Historically, when the economy is strong, interest rates go up,” Whetton said.

“The way to slow demand is to raise interest rates.”

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