ME Bank ‘Forced’ to Hike Mortgage Interest Rates – More Banks Will Follow

More evidence of the rising costs of funds as ME Bank says it has lifted its standard variable rate on existing owner-occupier principal and interest mortgages, effective today, 19 April 2018.

ME’s standard variable rate for existing owner-occupier principal-and-interest borrowers with an LVR of 80% or less, will increase by 6 basis points to 5.09% p.a. (comparison rate 5.11% p.a.^).

Variable rates for existing investor principal-and-interest borrowers will increase by 11 basis points, while rates for existing interest-only borrowers will increase by 16 basis points.

ME CEO Mr Jamie McPhee said the changes are in response to increasing funding costs and increased compliance costs.

“Funding costs have been steadily increasing over the last few months primarily due to rising US interest rates that have flowed through to higher short-term interest rates in Australia.

“In addition, ME continues to transition its funding mix to ensure the requirements of the Net Stable Funding Ratio will be met, and this is also increasing our funding costs.

“At the same time, industry reforms and increasing regulatory obligations are increasing our compliance costs.

“Despite these increases ME’s standard variable home loan for owner-occupier principal-and-interest borrowers with LVR 80% or less, is still lower than the major banks as it has been since ME became a bank in 2001. In addition ME also continues to offer some of the highest deposit rates in the market.

“This was not an easy decision, but rising costs have forced us to reset prices to maintain a balance between borrowers, depositors and our industry super fund shareholders and their members, all while ensuring we continue to grow and provide a genuine long-term banking alternative,” McPhee said.

“We will continue to assess market conditions and make changes to prices to maintain this balance if necessary.”

More hikes will follow, across the industry together with reductions in rates paid on deposits as the fallout of the Royal Commission and higher international funding costs take their toll.

The 10-year US Bond rate is moving higher again, following some slight fall earlier in April. Have no doubt, funding cost pressure will continue to rise.

^Home loan comparison rates calculated on a loan of $150,000 for a term of 25 years, repaid monthly.

Suncorp Hikes Interest Rates

From Australian Broker

Non-major bank Suncorp has announced it will hike interest rates on all variable rate home and small business loans, starting 28 March.

Variable Owner Occupier Principal and Interest rates will rise by 0.05% p.a., Variable Investor Principal and Interest rates will increase by 0.08% p.a., and Variable Interest Only rates increase go up by 0.12 p.a.

Suncorp’s Variable Small Business rates will increase by 0.15% p.a. and Access Equity (Line of Credit) rates will increase by 0.25% p.a.

The bank’s CEO David Carter said the decision to increase rates was based on increasing costs of funding, as well as meeting the costs associated with regulatory change. The outlook for US interest rates factored in the decision as well. “As a result, we have seen the key base cost of funding, being the three-month Bank Bill Swap Rate (BBSW), rise approximately 0.20%. This increase results in higher interest costs to our wholesale funding, as well as our retail funding portfolio, such as term deposits,” he said in a statement.

According to Suncorp, the “vast majority” of its customers will continue to pay rates well below the headline, due to the products’ various features and benefits.

“It remains our priority to offer a range of competitive products and services to all of our customers. The higher interest costs will benefit our deposit customers, with Suncorp offering attractive rates across term deposit and at call portfolios, including our new Growth Saver product that rewards regular savers with a 2.60% bonus interest rate,” Carter said.

ABA’s Positive Spin On ACCC Report

Every cloud, even the ACCC report, they say has a silver lining. The ABA found theirs…. but it sort of missed the point….

The Australian Banking Association welcomes today’s ACCC interim report into residential mortgages, which clearly shows very high levels of discounting in the Australian home loan market. It’s clear that competition is delivering better deals for customers, shopping around works and Australians should continue to do so to get the best discounts on the advertised rate.

The report itself states that “an overwhelming majority of borrowers with variable rate residential mortgages at the Inquiry Banks were paying interest rates significantly lower than the relevant headline rate” (the advertised rate). Discounts on home loans ranged between .78% and 1.39% below the relevant headline interest rate.

The advertised variable discount rate for home buyers today is 4.5%, close to the lowest ever recorded.

Data from APRA(1) and Canstar further illustrates there is strong competition in the home loan market, with over 140 providers, offering over 4,000 home loan products. Truly a vast and competitive market for Australians to choose a home loan.

Other evidence shows that Australians are taking advantage of this competitive market and are shopping around. Research by Galaxy shows that:

  • 3 million people had switched banks over the last three years.
  • Of those who had switched banks over the last three years, two-thirds (68 per cent) found that switching was an easy process.

ANZ and NAB Cuts Mortgage Rates

From The Adviser.

Two major banks have announced rate cuts of up to 50 basis points to their fixed rate home loan offerings.

ANZ Bank and the National Australia Bank are the last of the big four to announce cuts to their fixed rates, following similar announcements from the Commonwealth Bank and Westpac.

NAB has dropped its five-year fixed rate for owner-occupied, principal and interest home loans by 50 basis points, from 4.59 per cent to 4.09 per cent.

The bank has also reduced its fixed rates on investor loans by up to 35 basis points, with rates starting from 4.09 per cent.

As of Friday (9 March), ANZ also dropped fixed rates on its “interest in advance”, interest-only home loans by up to 40 basis points, with rates starting from 4.11 per cent.

Further, fixed rates on its owner-occupied, principal and interest home loans have fallen by 10 basis points, with rates now starting from 3.99 per cent.

RateCity money editor Sally Tindall believes that the rate movements have been influenced by the banks’ cash rate expectations.

“The fixed rate war shows our big banks are not pricing in a rate hike anytime soon,” Ms Tindall said.

“The series of cuts show competition has returned to the investor interest-only space. After reaching their caps imposed by APRA, the big banks are opening up their books again.”

Ms Tindall noted that the changes would be welcomed by borrowers seeking financial stability.

“This is good news for people in the market who are looking for the financial security fixed rates can bring.”

Ms Tindall concluded: “Five years without having to worry about a rate hike is the kind of peace of mind a lot of home hunters are looking for.”

Bluestone Slashes Rates by up to 105 bps

From Australian Broker.

Following rate cuts by a number of mortgage lenders, non-bank player Bluestone Mortgages said yesterday it has cut its interest rates by 75 to 105 basis points across its Crystal Blue products.

The Crystal Blue portfolio includes a range of full and alt doc products that provide lending solutions to established self-employed borrowers (with greater than 24 months trading history), and PAYG borrowers with a clear credit history.

The lender expects the rate reduction, coupled with the 85% low doc option, to drive the uptake of the portfolio. It said its Crystal Blue offering aligns well with a maturing SME market and would resonate well with the growing number of established self-employed borrowers.

The rate cuts come shortly after the company was acquired by private equity firm Cerberus Capital Management. As Australian Broker reported last month, parent company Bluestone Group UK is fully divesting its interest in Bluestone Mortgages Asia Pacific as part of the acquisition deal.

“As expected, the Cerberus transaction is already enabling the company to actualise a number of imminent opportunities that address current market demands,” said Royden D’Vaz, head of sales and marketing at Bluestone Mortgages.

He said the rate reduction is the beginning of many initiatives the company will implement to enhance or expand its portfolio.

“Self-employed borrowers are becoming increasingly savvy and more open to alternative funding. The sector is also becoming more proactive about seeking advice about the common challenges of managing working capital and/or obtaining financing,” he said.

The lender urges brokers to diversify into specialist lending to help them create loyal customers in the self-employed sector.

“We encourage brokers to embrace specialist lending as part of their dealings and not leave revenue on the table,” said D’Vaz.

Bank Funding And The Cash Rate

A really interesting, if technical paper from the Reserve Bank New Zealand, Analytical Note Series “Funding cost pass-though to mortgage rates“.  It shows the weaker linkage now between the official cash rate and mortgage rates, compared with before the GFC. It also shows that variable rates are more susceptible to lags in rates compared with fixed rates, and that fixed rates are were the competition is stronger.

These results emphasise the role of wider funding costs, not just monetary policy, for how banks set their mortgage rates. This is particularly the case for fixed-rate mortgages, given increased variability in funding costs and the composition of bank funding. It also shows how competition, and margin preservation are in play within the banks.  We suspect the same in true in Australia.

Prior to the global financial crisis (GFC), there was a relatively stable relationship between the Official Cash Rate (OCR) and retail mortgage rates. Changes in the OCR were typically accompanied by a proportional change in floating mortgage rates. However, this relationship has deteriorated since the GFC and the OCR on its own has not been a good proxy for bank funding costs. This paper examines the change in the transmission of the OCR, and the role of other funding costs for retail mortgage rates since the GFC.

Banks now place greater reliance on more stable (but more costly) sources of funding. They rely on domestic deposits and long-term wholesale funding more, and less on short-term wholesale funding. This has resulted in a wider and more volatile spread between mortgage rates and the OCR. Not all changes in the OCR have passed through one-for-one into floating mortgage rates, as funding costs from other sources have sometimes been offsetting.

We construct a comprehensive estimate of bank funding costs using a weighted average of the cost of domestic deposits, short-term wholesale funding and long-term wholesale funding. This weighted-average measure is further decomposed into a monetary policy rate component and a funding spread component. We use an error correction framework to measure the relative contributions of the policy rate and funding spreads to the level of mortgage rates in New Zealand, and estimate the speed of pass-through to mortgage rates from changes in funding costs.

Our results suggest that funding spreads have been larger post-GFC, and have had a larger impact on the level of fixed-rate mortgages than on floating rates. There has also been a significant slowdown in the pass-through from policy and funding spreads to the floating mortgage rate.

The speed of pass-through to fixed-rate mortgages has slowed only slightly.

Note: The Analytical Note series encompasses a range of types of background papers prepared by Reserve Bank staff. Unless otherwise stated, views expressed are those of the authors, and do not necessarily represent the views of the Reserve Bank.

US Mortgage Rates Continue To Climb

Mortgage rates continued higher following the release of the Minutes from the Federal Reserve’s (aka “The Fed”) most recent policy meeting.

The Fed was slightly more upbeat than markets expected, saying that most members agreed that a stronger economy increased the likelihood of further rate hikes.  Although the Fed Funds Rate doesn’t directly dictate mortgage rates, there is plenty of long-term correlation.  Because the Fed only meets 8 times a year to adjust rates (and rarely adjusts rates on all 8 occasions), bond markets (which include mortgage rates) are constantly adjusting to what the Fed will probably do in the future.


Of course, it could be argued that both the Fed AND financial markets are simply adjusting to the state of the economy, inflation, etc., but that’s more of a philosophical discussion (chicken vs egg type stuff).  What’s important is that financial markets saw a reason for the recent trend in rates to continue.  Unfortunately, today that meant rates moved to their highest levels in more than 4 years.  For what it’s worth, today’s rates are only microscopically higher than last week’s highs.

RBNZ Holds Official Cash Rate

The New Zealand Reserve Bank has left the Official Cash Rate (OCR) unchanged at 1.75 percent and released their February 2018 Monetary Policy Statement.

Global economic growth continues to improve.  While global inflation remains subdued, there are some signs of emerging pressures.  Commodity prices have increased, although agricultural prices are relatively soft.  International bond yields have increased since November but remain relatively low.  Equity markets have been strong, although volatility has increased recently.  Monetary policy remains easy in the advanced economies but is gradually becoming less stimulatory.

The exchange rate has firmed since the November Statement, due in large part to a weak US dollar. We assume the trade weighted exchange rate will ease over the projection period.

GDP growth eased over the second half of 2017 but is expected to strengthen, driven by accommodative monetary policy, a high terms of trade, government spending and population growth.

Labour market conditions continue to tighten. Compared to the November Statement, the growth profile is weaker in the near term but stronger in the medium term.

The Bank has revised its November estimates of the impact of government policies on economic activity based on Treasury’s HYEFU.  The net impact of these policies has been revised down in the near term. The Kiwibuild programme contributes to residential investment growth from 2019.

House price inflation has increased somewhat over the past few months but housing credit growth continues to moderate.

The Bank says ” Bank funding costs eased slightly in the second half of 2017. Consistent with the decline in funding costs and a fall in the two-year swap rate, the average two-year mortgage rate has declined by around 15 basis points since June 2017. In contrast, most other mortgage rates have remained relatively stable. Mortgage rates are higher than a year ago across all terms, but remain low relative to history”.

Annual CPI inflation in December was lower than expected at 1.6 percent, due to weakness in manufactured goods prices.

While oil and food prices have recently increased, traded goods inflation is projected to remain subdued through the forecast period. Non-tradable inflation is moderate but expected to increase in line with increasing capacity pressures.  Overall, CPI inflation is forecast to trend upwards towards the midpoint of the target range. Longer-term inflation expectations are well anchored at 2 percent.

Monetary policy will remain accommodative for a considerable period.  Numerous uncertainties remain and policy may need to adjust accordingly.

US Mortgage Rates Continue Higher Again

From Mortgage Rates Newsletter.

If you thought yesterday was bad for mortgage rates, you’re probably not going to be a big fan of today either.  And since today is the end of a week, we could similarly say you won’t like this week if you didn’t like the previous example.  That’s been true all year so far.  And hey!  Those week’s add up to a month (we’ll give yesterday and today a pass and consider them to be in the first month of 2018) so we can also say if you didn’t like the last month of 2017, you’re really going to hate the first month of 2018.

So what’s going on?  Nothing outside the ordinary.  The only problem is that “the ordinary” has involved bond market participants looking for almost every opportunity to sell bonds, thus pushing rates higher.  Today’s focal point was the big jobs report in the morning.  This data traditionally packs a big punch but it hasn’t been a big market mover recently.  That appeared to change today, but the rate spike had more to do with the fact that traders were intent on pushing rates higher anyway and simply waiting to make sure the jobs data didn’t throw a wrench in the works.  Granted, there was no way to know this would happen before it happened, but in any event, our default stance has been to assume rates will continue higher until they give us clear evidence to the contrary.  Needless to say, we’re nowhere close to amassing any such evidence after days like today.

Rates are now officially at the highest levels in more than 4 years.  The average lender is in the mid 4 percent range when it comes to quoting conventional 30yr fixed rates for well-qualified borrowers.

Industry body urges big banks to drop rates

From The Adviser.

The head of the Finance Brokers Association of Australia has called on the big banks to drop home loan rates.

FBAA executive director Peter White recently welcomed moves from non-banks to drop interest rates, but he stated that he’s “disappointed” that major banks haven’t followed suit.

“It is good to see the non-banks, second-tier and small lenders supporting home borrowers,” Mr White said this week.

“But at the same time, it is disappointing the big banks like ANZ seem disinterested in trying to work with borrowers by doing the opposite and putting their rates up.”

The FBAA executive warned banks not to “stab borrowers in the back” with “unjustified” rate rises and out-of-cycle interest rate changes.

“We hope in 2018 the big banks remember where their profits come from, and that is borrowers,” the executive director added.

However, Digital Finance Analytics principal Martin North told The Adviser that he expects the banks to increase, not decrease, rates, adding that a rate reduction wouldn’t be “feasible”.

“It’s not really feasible to cut rates in this situation when in fact I think we’re going to see rates rising,” Mr North said.

“Many borrowers can get extremely low rates at the moment, so I’m not sure there’s a need to slash rates further, and I’m not sure the banks will be able to because they’ve got margin compression going on behind the scenes.”

The economist believes that major banks are opting to “selectively” discount rates for specific borrowers as a way to “protect their margins”.

“[When] the interest-only books were repriced, that gave large banks, in particular, a bit of a war chest to be able to discount deeply, to offer new loans to targeted new customers. And that’s what’s playing out at the moment,” Mr North added.

“The fact is that the majors have tended to protect their margins and selectively discount loans to new customers.”

Mr North also advised borrowers to “shop around” to avoid the high rates offered by the major lenders.

The principal said: “A lot of the non-banks and also some of the customer-owned players have better rates than the majors, so if you are looking for a loan, shop around and go to some of those guys to get a better rate.”