Large home lender's big rates rise

CANBERRA: A deep collective breath is in order before angst over rising mortgage rates turns into outright hysteria.

So far only one major bank has lifted its crucial standard variable rate. Others have lifted fixed mortgage rates, but they are completely different animals.

The decision by the Commonwealth Bank of Australia to lift its standard variable mortgage rate by 10 basis points is significant, given that it is the nation's largest home lender.

The increase adds about A$18 to monthly repayments on the average A$300,000 home loan, although the Commonwealth had been offering the lowest variable rate among its peers.

The federal Government was obviously not happy, and while stopping short of calling it treason, said the bank was being selfish when the rest of the community was pulling together in these recessionary times.

The Commonwealth blamed rising funding costs for its reluctant decision.

While CBA home buyers are probably thinking "that old chestnut", the Reserve Bank of Australia has given the decision some credence.

In its monthly bulletin released on Thursday, the RBA said the major banks had reduced their variable housing lending rate by an average of 385 basis points since September last year.

"This is less than the reduction in the cash rate of 425 basis points, but more than the reduction in their average funding costs of 330 basis points," the paper said.

The report used data extending until the end of May.

"The recent financial turbulence means that, while the cash rate remains a key influence on banks' funding costs, the costs of the various forms of banks' funding have not fallen as much as the cash rate due to an increase in term premia and credit and liquidity spreads."

In the minutes of the central bank's June board meeting, released this week, it has also left the door open for a further cut in the official cash rate if needed. It last cut the rate in April.

But RBC Capital Markets senior economist Su-Long Ong now believes the cash rate has already bottomed at a 49-year low of 3 per cent. She had expected a further 50 basis points cut.

"While we remain cautious about the global recovery, which we expect to be modest and patchy, we do not think this will be enough to push the RBA to cut further from an already historic low," Ong said.

But she admits CBA's decision to lift its variable rate has complicated matters and "has the potential to tighten monetary conditions prematurely if repeated or if it sets a precedent".

"While we are far from convinced that the RBA would cut rates further if its policy traction is diluted, it is an added complication in the policy debate," she said.

CBA also lifted the rates for fixed rate mortgages, as have all the other major banks in recent weeks.

By their very nature, fixed rate loans only affect somebody taking on a home loan now, and not somebody who is already under a fixed term.

Whether this stops the rush of new entrants into the housing market because of the Government's more generous first-home buyers' grant remains to be seen.

But this is not some skulduggery by the banks. This, as National Australia Bank general manager of mortgages Steven Shaw said this week, "is business as usual".

Fixed rate mortgages are priced off Government bond yields, or interest rates, which have been under significant pressure.

This is partly because of the so-called "green shoots" global recovery that is being endlessly touted around the world, suggesting that low official interest rates will not be around for ever.

- AAP