Westpac off the blocks with fixed rate rise, more rises predicted

Westpac is the first big bank to raise home-loan rates this year, and industry watchers expect more to follow soon.

Westpac has been the first big bank off the block to raise home loan rates, lifting all its fixed-term rates, but looming rate rises on the horizon mean more hikes are expected soon. Picture: NCA NewsWire / John Gass

Westpac is the first major bank to hike its fixed home-loan rates this year – although analysts say it will be the first of many in the sector.

Westpac on Friday lifted all of its fixed rate products, with five-year fixed mortgages seeing the steepest rise of 0.2 per cent.

The bank’s one-year fixed rate rose 0.02 per cent to 2.39 per cent.

The move means all bank rates on three and four-year fixed home loans are above their pre-pandemic level in January 2020.

The lift in home-lending rates comes amid a spike in funding costs and expectations of rate rises in the United States, now forecast to arrive sooner than previously anticipated.

RateCity’s Sally Tindall said Westpac was the first big bank to lift rates in 2022 “but won’t be the last” soon.

“We expect other banks to follow within days on the back of sharp increases to the cost of wholesale funding,” she said.

“Mortgage holders who were fortunate enough to lock in a record-low fixed rate over the last couple of years are immune to these hikes, but only for the duration of their fixed-rate term.”

The Westpac increase came as Macquarie equity analysts increased their expectations of the sector – in particular ANZ.

“Considering evolving macro trends, rising inflation, and risk of rate hikes, the balance of risks appears more skewed in banks’ favour,” the analysts wrote.

“Banks benefit from higher rates, and while we believe the market tends to overestimate the ultimate upside, we see the risk of banks outperforming ahead of and during the rate rise cycle.”

“This suggests that higher rates can provide a 4 to 5 per cent swing in the earnings growth for banks in the next three years vs the previous three.”

The banking sector had underperformed the broader market in the last three months of 2021, although they finished the year 7 per cent ahead.

“On the longer-term view, with increasing competition and the ongoing need to invest, the fundamental outlook remains challenging for banks. However, for the first time in a decade, banks might be going into the fight with their hands untied if the rate cycle turns,” the investment bank said.

Westpac shares fell 13c – or just over 0.5 per cent – on Friday to close the week at $20.98. ANZ fell 1.6 per cent to $28.11.

RateCity’s Ms Tindall said banks were moving to hike their fixed rates as international bond markets were now asking more.

“At the moment really the key thing putting pressure on this funding is inflation,” she said.

“Things are moving rapidly right now, we’ve got so many factors at play here. The world is responding to Omicron and it’s a very different response to what it was to previous waves. It’s hard to know where it will end up.”

RateCity data shows for most of the big banks, three, four, and five-year fixed rate loans being offered were now asking more than was offered in January 2020, before central banks moved to respond to the Covid-19 pandemic.

However, one and two-year fixed rate loans, for now, remain cheaper than they were in January 2020.

Ms Tindal said for many borrowers who had fixed one or two-year loans in recent years were facing the question of what to do next. “Anyone who fixed at the start of the pandemic for two years should start thinking about what their next step might be. When they come off their fixed rate, they’ll be looking at a very different market,” she said.

“They have to take a step back from all the crystal ball gazing and making an informed decision from that point.”