Banks move to raise interest rates

After much speculation, the nation's five largest banks have all increased their home loan interest rates to cover the increased cost of funding in the wake of the US Sub Prime crisis. The St George standard variable rate will increase from 8.57 per cent pa to 8.77 per cent pa, effective from Tuesday, January 15, for new and existing consumers. St George is the latest big bank to make the move higher, stating that it has seen a significant increase in its funding costs.

"Over the past five months we have been absorbing increased funding costs of more than 0.30 per cent per annum, and have hoped conditions would soon return to normal and we would not have to pass these costs onto consumers," chief financial officer Michael Cameron said. "However, as this situation has continued, the bank has now changed its interest rates to take into account these increased costs."

Mr Cameron also blamed the impacts of the US sub-prime lending crisis on global liquidity and the wholesale funding markets for the rise in its funding costs. ANZ has also increased interest on its home loans by 0.20 per cent.

ANZ Chief Economist Saul Eslake said the bank has been impacted by "significant increased funding costs for mortgages" in the wake of the sub-prime crash. "ANZ has been absorbing increased funding costs on behalf of our customers for several months but it is now clear that the liquidity issues affecting global financial markets are likely to persist for some time," he said. Mr Eslake noted that ANZ tried to hold off passing these increased costs through to customers, but now that was no longer possible.

"Our decision not to pass on all the increased funding costs has been made in the interest of balancing the needs of customers and shareholders," he said. Interest rate increases by the banks without a Reserve Bank lead have not been common occurrences in the past. However, this can be seen as a reversal of the past decade's narrowing in the margin between the official interest rate and the actual rate paid by home borrowers.

For example, the cash rate in 1994 was 4.75%, yet home owners were paying interest rates at a minimum of 8.75%. Today, the standard rate paid is much unchanged, despite an official cash rate of 6.75%. The effects of the current credit crisis are likely to continue to expand this variance. When compounded with more official interest rate rises expected into 2008, it could be a deadly cocktail for borrowers.

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Published on January 1-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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