Australian borrowers and investors aren't out of the woods when it comes to the effects of the recent fall-out in the US sub-prime mortgage market.
While some non-bank lenders have already started raising their rates, banks continue to tread cautiously. However, there are signs that banks are buckling under the enormous strain of the US credit squeeze.
Adelaide Bank is the first traditional Australian bank to lift its rates on all new and existing low-doc home loans. The bank has raised interest rates by 30 basis points on these products - higher than the RBA's August interest rate hike of 0.25%. In an attempt to retain its customers, the lender is encouraging customers to switch from low-doc to full-doc loans depending on their eligibility.
Macquarie has followed suit, with an even bolder increase on interest rates for low-doc home loans: an interest rate rise of 0.30% on top of the RBA's 0.25%, resulting at 0.55%.
Non-bank lender Bluestone Group, which relies almost completely on wholesale funding for its lending, has also succumbed to the pressure of raising interest rates by as much as 0.25% on its low-doc loans.
Bluestone Group CEO, Alistair Jeffery, admits there's no doubt the volatility in the global markets has impacted on all lenders' cost of funding, regardless of whether they're a bank, non-bank or finance company. "This is due to the combined effect of risk being re-priced by investors, and lower levels of liquidity in the markets. Banks who are claiming they're immune from the impact and that it's a non-bank issue are either not talking to their own Treasury teams, or are taking higher funding costs on the chin while they wait for a longer-term picture to emerge."
He also added that it's highly likely that in the coming weeks, the other major banks will join Adelaide Bank and Macquarie in adjusting their mortgage lending rates.
Pepper Homeloans has passed on the RBA's 0.25% increase only to existing customers while slugging an extra 0.15% on to the 0.25% for new loans.
Despite the overall tension, Mortgage House announced this week that rates on their loans funded through their self-funded program would remain on par with the RBA's levels and will likely rise in line with changes to external funders and banks.
Ken Sayer, CEO of Mortgage House, said borrowers should start reducing personal debt in order to soften the blow on further potential rate rises. "As interest rates are cyclical, now's the time to act. Concerned borrowers should contact their lender or financial adviser straight away to ensure they have the best available deal."