Majors tipped to reprice ‘lower quality’ mortgages

In a research note published on 22 November, BondAdviser explored the possibility that Australian mortgage rates could be heading north after an increase in longer-term interest rates driven by a spike in the US Treasury 10-year bond yield.

BondAdviser noted that global bond markets have priced in a higher probability that the Fed will hike interest rates in it December meeting (as the US incoming administration is expected to favour pro-growth economic policies which are naturally inflationary in nature).

“In Australia, this has meant a steepening of the Australian government yield curve as the RBA is now expected to remain on hold for much of 2017 (therefore limiting the increase in yield of shorter-dated bonds). On the other hand, longer-term bonds have moved higher in yield, influenced by the move in longer-term US bond yields and inflation expectation,” the research company said.

Given the regulatory requirements given to Australian banks over the past few years and the subsequent drag on profitability, BondAdviser believes there may now be an incentive for the major banks to reprice Australian mortgage products upwards to protect margins.

“The major banks may choose to do this by either restricting credit further via further tightening of credit standards and therefore engaging in a form of credit rationing, or perhaps by repricing lower quality (or underperforming loans) in the hope that borrowers will seek an alternative and cheaper mortgage provider (as a way of protecting the bank balance sheet against a future rise in impairments as interest rates start rise and overcommitted borrowers struggle with repayments),” it said.

“Overall, the possibility of higher mortgage rates is now much more realistic than before.”

Westpac yesterday increased its fixed-rate home loans by up to 60 basis points following a round of rate hikes by the non-bank lenders in recent weeks.

Last week ME announced an increase to its variable and fixed-rate mortgages while NAB-owned online lender UBank lifted its standard variable rate by 10 basis points.