Australia’s biggest banks might be on the brink of increasing borrowers’ mortgage repayments – and the Net Stable Funding Ratio (NSFR) is to blame.

The NSFR is one of the Basel Committee’s key reforms and is designed to promote a more resilient banking sector. Australian banks are expected to comply with international regulations as part of a broader program to make banks safer and boost the amount they hold in deposits.  

On the downside, this move is likely to hurt Aussie borrowers at a point when debt levels have reached record highs. Steve Johnson, chief investment officer at Forager Funds Management, said many borrowers have told him they wouldn’t be able to afford their mortgage payments if interest rates rose “meaningfully” (a meaningful lift in interest rates would be around 2%).

Brett Le Mesurier, banking analyst at Velocity Trade, said it was possible banks would need to reduce the discounts they offer some loan customers by close to that amount. “Banks have a standard variable rate and…when customers go for a mortgage, they will be offered some level of discount,” he explained.

“The discount can be anywhere up to 1.5 per cent or more. It may be manifested by a reduction in the rate of discount that's being offered. [Hence] if they're paying more for their funding, to maintain the margin necessarily means that mortgage rates go up.”

These decisions are related to the NSFR, a part of the Basel III accord. Basically, international banking regulators have told Aussie banks to start relying more on domestic customer deposits to fund loans and reduce their reliance on overseas money markets.

At the moment, Aussie banks rely heavily on overseas money markets to fund domestic home loans because it’s often considered cheaper than paying interest on deposits.