Westpac, St George Bank lift rates for interest-only borrowers

Westpac’s latest rate increase will hit owner-occupiers harder than investors.

Westpac’s adjusted fixed rates are for new loans only.

Westpac has increased fixed rates for interest-only loans in the wake of a crackdown by regulators aimed at cooling runaway property prices, but this will hit owner-occupiers harder in the latest series of out-of-cycle rate changes.

Owner-occupiers taking out fixed-rate interest-only loans face three times the increase in rates as investors, with a raft of changes announced yesterday eliminating a gap between interest costs for the two types of buyers.

However, principal and interest-only fixed-rate loans for two or four years have been cut, with investors advantaged by larger reductions but still paying a premium over owner-occupiers.

Westpac will cut fixed-loan rates by between 11 basis points and 31 basis points for principal and interest borrowers, while its St George Bank subsidiary has cut rates by 20-25 basis points.

The cuts for principal and interest borrowers make Westpac and St George the cheapest among the big four lenders for two, three, four and five-year loans, with rates from 3.88 per cent to 4.39 per cent. Increases for investor loans have also made the Westpac and St George products the most expensive, ranging from 4.46 per cent for two-year fixed rates to 4.86 per cent for five years.

The new rates are only for new borrowers and do not affect ­existing loans or variable rate ­borrowers.

Commonwealth Bank of Australia, the country’s biggest home lender, increased rates by 25-50 basis points on Friday, making the bank the most expensive for everything except three and four-year interest-only owner-occupiers and for two to five-year interest-only investors.

“In response to recent regulatory changes, we have both decreased and increased some of our fixed rates for customers who wish to fix their home loan,” a Westpac spokesman said.

“We are reducing some of our fixed rates by up to 0.31 per cent for customers who make principal and interest repayments, to encourage customers to pay down their home loan in this low-interest rate environment.”

The rate changes follow multi-pronged action last month by regulators who warned that interest-only loans were more risky when interest rates around the world were moving higher and borrowers had little financial buffer to meet higher rates or a loss of income.

Interest-only loans have surged by almost a third to account for 40 per cent of all loans being written in Australia, suggesting borrowers are relying on rapidly increasing property prices rather than repayments.

But the Australian Prudential Regulation Authority said it wanted banks to restrict this to 30 per cent of loans.

Banks have been increasingly moving rates on their own rather than waiting for changes in official rates directed by the Reserve Bank. Increases in variable rate loans this year were pinned on rising international borrowing costs for the banks as markets anticipated increases in US rates.