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The Commonwealth Bank: mortgage rates to rise

23rd November 2007
By Petter Ingemarsson

The Commonwealth Bank has announced a mortgage rate rise.

The Commonwealth Bank has become the latest Australian bank to announce that it will pass on the recent rise in funding costs to its mortgage customers, and other banks are expected to follow suit. As a result, further financial pressure will be placed on struggling Australian mortgage holders, with no signs of relief anytime in the near future.

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The largest bank in Australia, the Commonwealth Bank (CBA), has revealed that it will raise the rates on its variable rate mortgages. At the same time, the bank has warned that further rate rises loom on the horizon. This move follows the Reserve Bank of Australia's (RBA) recent interest rates rise by 25 basis points to 6.75%.

Economists have warned that further rate rises are expected as strong spending and wage growth exert inflationary pressure on the Australian economy. The major banks have already raised the rate on their fixed-rate mortgages in recent weeks, by an average of 40 basis points. National Australia Bank (NAB) was the first of the major banks to alert customers that the higher RBA cash rate would be passed on.

Both CBA and NAB have also warned that mortgage rates will probably rise by even more than the rise in the cash rate. Although the major banks have sizeable deposit bases from which they can fund their loans, strong continuing demand for mortgages has forced the banks to fund some of their balance sheets from overseas money markets. Costs in these markets have spiraled in the wake of the global credit crunch, and the major banks are expected to pass on these costs to mortgage customers.

At the same time, the major banks' main competitors in the Australian mortgage market are unlikely to be able to capitalize on the situation, since they are in even more dire straits. Non-bank lenders rely, to an even greater extent, on overseas money markets, since non-bank lenders have no deposit base to cushion changes in interest rates. Among the recent casualties on the Australian markets, non-bank lender RAMS has seen its share price plummet from A$2.50 to a closing price of A$0.22.

This development places further pressure on already stressed Australian mortgage holders. Housing affordability is at record lows, and the situation is likely to become even worse.
'End Intelliext

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