There is no document or formula that exists behind Westpac’s decision to raise interest-only loan rates in light of lending speed limits imposed by the Australian Prudential Regulation Authority (APRA).
Instead, the bank has said differentiating rates between interest-only and principal and interest loans have been made as a “judgment”.
These claims came to light when Westpac’s CEO Brian Hartzner and chief financial officer Peter King faced the House of Representatives Standing Committee on Economics in its review of Australia’s four major banks in Canberra yesterday (11 October).
The bank made estimates around what the size of the gap between IO and P&I rates would be, Hartzner said. While forecasts were made around these changes, it was difficult to see exactly what would happen as it was impossible to accurately guess how many customers would switch mortgage types.
“It’s not a mathematical formula, it’s a judgment,” he said.
While there was no physical documentation that exists around different price points, Hartzner admitted the bank would have modelled around profitability and rate changes.
“Obviously we consider commercial issues in the things we do.”
When committee chair David Coleman questioned whether regulation was being used to boost bank profits, Hartzner outright denied this.
“I would reject the idea that compliance is a profit centre.”
Westpac spends $300m to $400m per year on compliance – fees which the bank was not going to recuperate, he said.
Profit was not a primary driver for these changes, he said, stressing that the main push was to manage Westpac’s balance sheet.
At the moment, around 50% of Westpac’s existing loan book consists of IO loans.
Hartzner’s message to borrowers was simple.
“Switch to a principal and interest loan. It’s cheaper.”