Australia's biggest banks are accused of cashing in on the credit crisis after they increased their interest rates on their mortgages outside the Reserve Bank of Australia's official cash rates in a bid to offset higher funding costs.

After much speculation, Westpac and St.George joined its rivals in raising the rates on their standard variable loans on Friday. Westpac raised by 0.15% to 8.72% effective January 14, while St.George chose to increase it by 0.20% to 8.77%.

Earlier, the Commonwealth Bank of Australia (CBA) raised its variable rate by 0.10% to 8.67%, while National Australia Bank (NAB) hiked by 0.12% to 8.69% and ANZ Bank by 0.20% to 8.77%.

Non-bank lender Resi Mortgage Corporation says the banks misrepresented the true impact of the US sub-prime crisis and its effect on bank interest rates.

Resi's head of consumer advocacy, Lisa Montgomery, says since August last year, when the sub-prime crisis emerged, Australian banks had strategically used the global credit squeeze to disparage the reputation of non-bank lenders in a clear bid to claw back market share.

"They saw an opportunity to get market share back in August and that's exactly what they did," she says. "Scaremongering by banks over the impact of the tightening credit market has done the public a great disservice - which is only now becoming obvious."

She points out that the major banks at the time also delivered a barrage of negative comments, scaring consumers into believing that non-bank lenders would be more adversely affected (than banks) by the increased cost of funding, which would be reflected in significantly higher interest rates.

Montgomery says this gave consumers a false impression that all non-bank lenders would cost them more to borrow. "Customers felt safe with their choice with the banks and that's what they did, so it leaves them in a situation where they could actually be paying higher rates when, historically, non-banks are cheaper anyway."

She also notes that there has been a price disparity between the standard variable rates among banks which could now make choosing a home loan more confusing.

Montgomery urges customers to reinstate their faith back into non-bank lenders and to include them in their search for a mortgage. "A lot of people see prestige in taking a bank loan but frankly it's not necessarily the best deal. Put your faith back into non-bank lenders if it's been shaken, because you'll still get a very good deal from them."

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