Westpac says low home loan rates 'unfair' to business

WESTPAC tries to justify its recent increase to home loan rates, saying it would do no-one favours to offer rates that were unsustainable.

WESTPAC has justified its recent increase to home loan rates, saying that it would do no-one favours to offer rates that were unsustainable.

Australia's second largest home loan lender also says it already absorbed some of the rising costs of funding.

"We absorbed some of the external cost increases, rather than pass them on to borrowers at the expense, of course, of shareholders," chairman Ted Evans said at the bank's annual general meeting.

"With interest rates now clearly on the rise again, both at home and abroad, there are limits to how long we could continue to absorb these costs without weakening our bank, the Australian financial system and, hence, the Australian economy.

"We would do no favours to anyone by offering mortgages at rates that we know to be unsustainable."

Earlier this month, Westpac increased its variable home loan rate by 45 basis points, after the Reserve Bank raised the cash rate by 25 basis points to 3.75 per cent.

Mr Evans said it would not be fair for home loan borrowers to pay lower rates while business borrowers faced higher interest charges.

"Nor is it fair to other borrowers, such as small business owners, or even large project developers, to have their interest rates increased so that mortgage rates can be subsidised," he said.

"Nor is it fair to those who save to have deposit rates held down so that mortgage borrowers can be subsidised."

In a properly functioning financial system with strong banks, institutions must adjust rates in line with market pressures, and Westpac did that on December 1, Mr Evans said.

"Competition in the markets will ensure that power is not abused, and as has been demonstrated again in recent weeks, such competition is alive and well in Australia," he said.

NAB increased its home loan rate by 25 basis points this month to end up with the lowest rate among the big four, and called on Westpac customers to consider switching banks.