Homeowners and property investors need to get ready to face higher interest rates, as Westpac Banking Corporation (ASX: WBC) raises rates on all its variable rate mortgage loans.
That's despite no change in the official cash rate by the Reserve Bank of Australia. Our cash rate is still stuck at 2% and appears likely to stay there or perhaps fall slightly in the near future.
Westpac says the 0.2% rate rise is in response to increased capital requirements after the bank announced a $3.5 billion capital raising today. Including this raising, Westpac has raised around $6 billion in new equity capital.
George Frazis, chief executive, Consumer Bank said in the announcement, "As we have always said publically, while Westpac is well placed to meet these changes, a significant increase in capital ultimately increases the cost of providing home loans to customers."
Depositors will also benefit, with the bank raising selected term deposit rates by 0.25%.
Westpac's move is the first move by the big four banks, and Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd (ASX: NAB) are likely to follow suit. All three have had to raise capital from shareholders so far this year and will probably raise even more. Expect those announcements to be accompanied by rate increases on mortgage loans.
The problem for the big four banks is that raising rates gives their smaller competitors a chance to compete on a more level playing ground, and could see the big four lose some of their dominant market share for Australian mortgage loans. Regional banks and non-bank lenders will be jumping for joy.
Painted into a corner by the banking regulator, the Australian Prudential Regulatory Authority (APRA), the big four virtually have no choice but to issue more shares at discounted prices. To maintain their levels of profitability and return on equity, higher interest rates really were inevitable.
Property investors and homeowners will also face an additional consequence. Banks raising mortgage rates may crimp credit growth and add to the downward pressure on home values.
Foolish takeaway
All in all, it means more competition for mortgages, which is good news for consumers, but bad news for homeowners and property investors who don't take a proactive approach to looking for the best mortgage deals.
It's not great news for bank shareholders either, who will see their holdings diluted unless they kick in more capital, along with reduced dividends per share and a lower share price.
