NAB springs mortgage interest rates surprise

NAB says it’s confident its home loan borrowers will be able to afford the higher rates it will soon be charging.

NAB chief executive Andrew Thorburn faces last week’s parliamentary inquiry in Canberra. Picture: Kym Smith

National Australia Bank expressed confidence home loan borrowers could withstand higher interest rates after surprising the industry with a fresh out-of-cycle repricing of most of its mortgage book to prop up margins.

A week after the chiefs of the big four banks appeared before a parliamentary inquiry, NAB yesterday lifted variable owner-­occupier rates by seven basis points to 5.32 per cent and investor loans 25 basis points to 5.8 per cent, effective from March 24.

The move, expected to be followed by rivals, could increase NAB’s earnings by about 4 per cent, according to analysts, based on the bank’s $137 billion portfolio of owner-occupier mort­gages and $100bn worth of investment loans.

It marks the first time a major bank has raised prices for both investors and customers who live in their homes since late 2015, when Westpac led the industry in repricing home loan books following the regulator’s tightening of mortgage capital requirements.

NAB — whose chief executive, Andrew Thorburn, also chairs the Australian Bankers ­Association — has increasingly been getting on the front foot, in December raising investment loan rates 15 basis points in a move followed by rivals.

With fresh Reserve Bank research yesterday claiming the banks’ debt funding costs fell 35 basis points in 2016 and have been “little changed” since, competition to lend appears to be taking a bigger toll.

NAB chief operating officer Antony Cahill said “as we move into 2017 competition certainly remains extremely intense and margin pressure is ongoing”, building the 12-basis-point fall in the bank’s home lending margin in the second half of last year to 1.28 per cent.

Morningstar analyst David Ellis said the banks were repricing their loan books quicker than expected this year and NAB’s move on owner-occupier rates was “surprising” rather than raising prices only for investors.

“I expect the other major banks will follow in some shape or form in the near term,” he said. “NAB has taken the opportunity to support margins under the guise of responsible lending and slowing down investor lending.”

Mirroring previous years, the big banks are repricing loan books to offset muted revenue growth, margin pressures, regulatory headwinds and bad debt costs even though the Reserve Bank’s official cash rate is on hold.

Warwick McKibbin, professor of economics at the Australian National University and a former RBA board member, said rising interest rates globally, particularly in the US, was pushing up long-term borrowing costs for nations reliant on offshore capital.

“That will be passed through pretty quickly from the banks and other mortgage suppliers to the market,” he said.

Mr Cahill said the bank took into account all factors, including the recent parliamentary hearings where banks were questioned on interest rates and misconduct, when balancing “difficult” decisions for shareholders, depositors and borrowers.

NAB, which also launched a new fixed rate for first-home buyers at 3.69 per cent, blamed having to increase interest rates on competition, “elevated” funding costs and adhering to the banking regulator’s 10 per cent growth cap on investor lending.

Mr Cahill said the bank was “very aware” of customers’ cost-of-living burdens and that NAB ensured there were clear buffers in place when loans were written to ensure borrowers “should be in a position they can absorb increased repayments” if required.

“Mortgage rates are still at historically low rates,” Mr Cahill said. “We are comfortable with our credit risk profile of our mortgage book at the moment and certainly with these increased repayments we believe our borrowers will be able to continue to make their repayments.”