With S&P Global ratings cutting its outlook on Australia's AAA grade to negative, home buyers could face much higher costs on their mortgages as banks will surely pass funding costs to their consumers.
S&P explained that Malcolm Turnbull's election win was not strong enough to allow for forceful fiscal policy measures to curb budget deficits. The outlooks for the four largest banks—Australia and New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd., and Westpac Banking Corp.—were also immediately reduced because their credit scores benefit from government support.
"An increase in funding costs relating to a ratings downgrade will impact bank margins, but banks may choose to offset this via loan pricing," said Anthony Ip, a credit sector specialist at Citigroup Inc. However, he also pointed out that the extra funding costs would be manageable. "At the end of the day, it's still a competitive lending market," he said.
According to Citigroup, if rankings are lowered for Australia's big four banks after a sovereign downgrade, borrowing costs could increase by as much as 20 basis points and mortgagees may have to deal with higher interest rates. A 25 basis points increase on a A$300,000 30-year home loan could add $A62 to the monthly interest payment.
Historically speaking, banks make homeowners shoulder some of the burdens once they are confronted with increased funding costs. Last October, all the big four banks raised their mortgage rates for owner-occupiers for the first time in five years due to the higher cost of holding more capital.
"While the banks have pricing power, they have passé don funding costs before to customers and it could happen here, too," said David Walker from equities management firm Clime Investment Management.
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