Australia: Mortgage rates increase as funding costs rise

Macquarie Bank is the latest lender to increase mortgage rates. Many mortgage-providers have already raised their rates and more banks, including the big 4, are expected to announce out-of-cycle rate increases over the coming months.

The primary cause of the rate hike is increased funding costs. Banks provide loans based on the funds they hold, with savings and transaction accounts forming the bulk of bank funding. To provide new mortgages, the banks’ most profitable product line, lenders first need to ensure that they have enough customers depositing with them.

Currently, competition for funding is fierce and so banks are increasing interest rates on savings accounts. According to RFi Group data, interest rates are one of the most important considerations consumers have when choosing their largest savings account; 1 in 3 indicated that rates guided the choice of their largest account. Bonus rates were found to be more important (18%) than ongoing rates (13%).

However, the most important consideration is having an existing banking relationship (49%) and so banks should also focus on other product lines (such as transaction accounts) and aim to cross-sell savings accounts with these.

Increasing mortgage rates will allow lenders to offset these additional funding costs but will also reduce demand; interest rates are the most important factor borrowers consider when searching for a mortgage. However, lenders can offer other features to make their mortgage products more competitive.

According to RFi Group data, the ability to make overpayments, no application fees and 100% offset accounts were the most important factors borrowers considered when searching for a mortgage, after interest rates. Further rate hikes could also be applied should the RBA announce its own rate increases.

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