Banks to raise rates any day now

HOMEOWNERS are likely to feel the bite of higher mortgage repayments sooner rather than later, with three of the big banks already reviewing their...

Banks to raise rates any day now

HOMEOWNERS are likely to feel the bite of higher mortgage repayments sooner rather than later, with three of the big banks already reviewing their home loan rates after today's official interest rate hike.

National Australia Bank (NAB), Commonwealth Bank of Australia (CBA) and Westpac, say they are reviewing their interest rates after the central bank today lifted the official cash rate by 25 basis points to 7.25 per cent.

The big banks are expected to pass on the hike to home loan customers in coming days. This would add around $50 a month on a $300,000 a home loan taken out over 25 years.

Standard variable home loan rates have risen from 6.05 per cent in April 2002  to 9.20 per cent now, assuming the banks pass on the latest rise.

How high will they go?

Generally, banks only raise interest rates in line with official cash rate movements by the Reserve Bank. But in January this year, the big banks broke with tradition and raised their variable home loan rates despite the fact the RBA had not moved.

The banks cited higher borrowing costs in the wholesale market due to the fallout from the US subprime crisis - where big banks lost billions on bad loans.

Herald Sun business commentator Terry McCrann expects the RBA to hold fire on another rate rise next month, but said banks might be tempted to keep increasing home loan rates regardless.

"Yes you might get some relief from the RBA next month, but you are probably going to get a defacto - but very real hike - from the banks."

Political pressure

This would be a very unpopular  move with the Government, which has been exerting pressure on banks, despite not having any official influence on what they do.

This morning Prime Minister Kevin Rudd warned banks that movements above and beyond the RBA hike could promt him to consult with the Australian Competition and Consumer Commission (ACCC). 

"We are in continued contact with the ACCC, the competition watchdog, about what other measures may be possible.

”I will just leave it at the 'what other measures might be possible','' he told the Seven Network.

This afternoon Treasurer Wayne Swan warned banks that customers would vote with their feet if financial institutions raised mortgage rates higher than the quarter of a percentage point.

"Bank customers will treat banks harshly in an environment where we have rising interest rates through the official cash rate if they take the opportunity to pass on in an excessive way other costs that they face,'' Mr Swan said.

"It is true banks are facing an increased cost of borrowing, and in some cases that is substantial, but we are not sure how long that will last.''