Big banks set to cut mortgage rate deals

MAJOR banks could cut mortgage discounts offered to soften the blow of increased funding costs.

ANZ's Australian chief executive Phil Chronican says banks are looking at cutting mortgage deals in a bid to ease the credit squeeze / Sam Mooy

THE major banks could cut discounts on mortgage rates offered to customers to soften the impact of increased wholesale funding costs and avoid having to pass on higher interest rates in an election year.

Banks are facing mounting pressure from the Government not to increase lending rates out of cycle with the Reserve Bank, even though the European debt crisis has triggered a blowout in funding costs, The Australian reported.

ANZ's Australian chief executive, Phil Chronican, said the banks were already beginning to make changes to mortgage packages, particularly reducing brokerage fees, to ease the current margin squeeze.

It is estimated ANZ, which has a $140 billion home loan book, has lost about $40 million through the elevated wholesale funding prices and the current competition for retail deposits.

Westpac, Australia's second largest bank, has forecast the 15-basis-point margin erosion experienced in the first half of the current year has cost it about $120m on its $250bn mortgage book.

In an interview with The Australian, Mr Chronican said it was likely the local banks would restructure the "value-based pricing" of mortgages which could include reducing the discounts on the average standard variable rates offered to some new and existing customers. "If you look at it recently, what you have seen in the market is people rejigging their brokerage commission rates . . . that's the way the market has moved," he said.

The market is also moving towards banks raising the valuation-based pricing of mortgages.

"The banks offer discounts based on the valuation characteristics of a loan. In the future we may see that being used differently by banks as they fine tune their home loans," Mr Chronican said. "At the moment, the discounts usually apply to people with a reasonably high income and they have equity in their existing home -- there is a lot of different pricing out there."

ANZ currently has the second highest variable rate at 7.41 per cent, behind Westpac's 7.51 per cent, but ahead of the CBA's 7.36 per cent and NAB's 7.24 per cent. At least one other bank -- Westpac -- is understood to be contemplating looking at its discount pricing for mortgages to relieve the chance of having to implement out of cycle rate rises.

Mr Chronican said ANZ, and its rivals, were prepared to suffer the margin squeeze to maintain market share.

ANZ holds a 12.5 per cent share of the Australian home loan market, slightly behind NAB at 13.2 per cent, and lagging market leaders CBA with 25.9 per and Westpac at 24.1 per cent. ANZ and NAB implemented strategies during the global financial crisis to slow mortgage lending in a bid to lessen reliance on wholesale funding markets.

"The cost of funding a home loan portfolio is continuing to go up and retail deposit rates and wholesale funding spreads are high," Mr Chronican said.

"There's no doubt that if you're trying to maintain margin, it's hard to do that.

"But what we have tried to say is that you always get customers who feel the brunt . . . so at times it's not in our long-term interests as an organisation to pass all of the costs through to customers. We can't rule it out in the future, nothing is certain.

"But on the balance, we are sharing some of the pain."

In the past six months, ANZ has grown mortgages at 1.6 times system growth.

Mr Chronican said he was keen for ANZ to maintain its mortgage momentum but not to expand the loan book too rapidly.

"Our home loans have been growing at more than system. I don't want it to get too fast," Mr Chronican said.

"I don't want a boom and bust lending cycle where you lend too much this year and you have to cut back later.

Read the full interview with Phil Chronican in The Australian.