Home loans are expected to jump 80 basis points, which will place added pressure on existing property buyers. Lenders are also preparing to lower discounts for new borrowers.

Additional mortgage rate increases are expected due to the knock-on effect of the US Federal Reserve raising rates, which has increased the cost of international money used to fund mortgages.

“The knock-on effect for Australia is significant,” said Martin North, principal of Digital Finance Analytics, in reference to the latest spike in the benchmark T30 US bond yields.

“Lenders will have to pay more for their capital markets funding,” said North. This is due to the ‘Trump effect,’ which is increasing funding costs as international markets anticipate that the US president-elect will slash taxes and approve massive infrastructure spending.  

Meanwhile, local lender pressure to boost their share of the deposit market and regulatory pressure to build capital buffers will continue to rise throughout 2017, said North. He expects rates to rise by about 50 basis points over the next 12 months, which would mean additional annual payments of about $1200 on the average mortgage. Australia’s national average is about $444,000, rising to $544,000 in Sydney.

ME Bank has followed CBA, the nation’s largest mortgage lender, by foreshadowing rises in reference rates. Melbourne-headquartered ME Bank will increase the reference rate for all variable products by 10 basis points from 4 January.

Increases in reference rates to squeeze margins

A reference rate is the base that applies to a borrower’s loan, and generally reflects the type of product, purpose, and repayment type.

An interest rate is the interest amount the borrower pays on their loan. Banks calculate interest rate, also known as the annual percentage rate, by starting with the reference rate and adding or subtracting any premium or discount (known as the margin).

Mortgage brokers, who act as intermediaries between lenders and property buyers, expect increases to reference rates to squeeze margins. This translates to smaller discounts for property buyers.

“Property buyers could find they are no longer getting heavily discounted rates,” said Christopher Foster-Ramsay, managing director of Foster Ramsay Finance. He observed that borrowers are increasingly switching to borrowing products that offer a fixed and variable component. 

The Big Four and most of the other major banks and non-bank lenders have increased rates, mainly on fixed products, but increasingly on variable products as well.

Rising swap rates are raising the costs of deposit funding and contributing to the latest round of increases by more than 80 basis points on variable rates for new investment loans with loan-to-value ratios of more than 80%.