AMP raises rates as funding costs bite

AMP has become the latest lender to hike interest rates, saying it can no longer absorb soaring funding costs.

AMP has become the latest lender to hike interest rates for home loan customers, saying it can no longer absorb soaring funding costs that show no sign of easing.

AMP Bank, which has a $14 billion mortgage book, said it was lifting variable rates for both owner-occupier and investor home loans, with the changes effective from today for new customers and July 16 for existing customers.

Owner-occupiers paying off principal and interest loans will see their rates rise by 8 basis points to 4.13 per cent, while those paying interest-only mortgages will face a 17 basis points hike to 4.73 per cent.

For investors, both principal and interest and interest-only loans will be hiked by 17 basis points.

AMP Bank group executive Sally Bruce said the rises were driven by higher funding costs.

“We are managing our portfolio in a very active market and our decisions on rates are never taken lightly,” Ms Bruce said.

“We have held off passing this cost on to customers for as long as we can and in fact have not increased interest rates for existing customers since June last year.

graphic for WEB on AMP for business

“With any change, we are focused on balancing the interests of our customers, the regulator and our business.”

Macquarie, Bank of Queensland, IMB, Suncorp, Pepper Group and ME Bank have all increased home loan rates in recent weeks due to soaring short-term bank funding costs which are squeezing net interest margins.

The spread between the three-month bank bill swap rate and the overnight index swap has been increasing since February and hit its widest point since 2010 last month. While the wider spread was initially thought to be a cyclic shift, analysts now believe it may be a more structural, permanent move.

“More recently, we have seen a sustained increase in the spread from its lows of around 20 basis points to 62 basis points, suggesting that these changes are more structural and permanent in nature, with few prospects of reversing,” Citibank analysts said in a note to clients.

Australian bank funding costs usually move in line with their global counterparts, but they have decoupled in recent months, leading to suggestions there are domestic issues at play. Analysts are still unclear as to what’s driving the rise.

Rivkin Securities investment analyst William O’Loughlin said recently that wholesale funding rates were expected to remain higher in the short-term. “If these rates remain elevated banks may be forced to hike borrowing rates independently from any change in the official cash rate,” he said.

The big four banks are widely tipped to follow the smaller lenders and hike rates by September in a bid to improve earnings expectations for the 2019 financial year, though there is speculation that political sensitivities may see them hold fire or raise rates by less than they otherwise may have.

Fears of a looming credit crunch are also dogging the market as banks tighten lending standards at a time when house prices are declining.

“We think the consumer is facing a cash flow and credit crunch given weak income growth, ‘cost of living’ inflation, tighter credit conditions and interest-only switching, which will put pressure on discretionary spending and household savings,” Morgan Stanley said in a recent note to clients.

But Australian Prudential Regulation Authority chairman Wayne Byres this week said the “heavy lifting” on lending standards had “largely been done”.