Why Rising NAB Home Loan Rates Foreshadow Interest Rates Cuts

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National Australia Bank (NAB) is raising home loan interest rates by 0.17% from November 12. The change will force up NAB [ASX:NAB] variable home loan rates to 5.6%.

The move comes hot on the heels of similar changes made by the other major banks. Westpac [ASX:WBC] increased its variable home loans rates by 0.2% last week. And, just yesterday, Commonwealth Bank [ASX:CBA] also shifted  rates up by 0.15%.

That leaves ANZ as the only big four bank still sitting unmoved. But it’s only a matter of time before it follows suit. It doesn’t have much choice. None of the banks do. APRA regulations have hit lenders hard. First it restricted investor lending growth to 10% a year. It then demanded banks raise their capital reserve ratios. Lenders are required to lift capital ratios to offset the risk of their mortgage lending. For banks, that invariably increases the costs of lending.

To their credit, they haven’t wasted any time.

Already we’ve seen moves by the big four banks to buffer their balance sheets. NAB’s capital raising scheme has raked in $5.5 billion this year. Westpac and CBA have each raised a similar amount. Only ANZ is below this threshold, at $3 billion.

Even though banks have raised $30 billion in equity, they still have a long way to go. Recent estimates put these requirements at $35 billion.

How the change affects NAB customers

NAB’s 0.17% home loan rate rise will force up monthly repayments for its customers.

On a $300,000 loan, you’re looking at paying an extra $30 each month. On a $500,000 loan, that rises to $50 a month. And so it goes, rising in $10 increments every 100k. With a million dollar home loan, repayments will increase by an extra $101 a month.

But NAB’s other set of ‘customers’ will be a little happier about this development.

NAB shareholders saw today’s move in a more positive light. Any why not? They’re the ones stumping up the cash to fund the capital raising scheme, after all. Someone has to pay for it. But NAB is careful about heaving the entire burden on shareholders. In lifting rates, NAB is sheltering shareholders from shouldering all the costs.

On the back of the announcement, NAB’s share price is up 2% to $32.47.

Interest rates at 1.75%?

Banks typically take their cues from the Reserve Bank when adjusting variable loan rates. That they’ve jumped the gun speaks volumes of APRA’s regulatory guidelines. We know why they’re doing this. But it’s possible that some banks have merely hedged their bets by lifting home loan rates. They might simply be laying the groundwork in preparation for interest rate cuts.

CBA provides the clearest evidence of this. In July, CBA raised investor loan rates by 0.27%. On Thursday, home loan rates went up another 0.15%. That change applied to both investors and owner occupiers. All told, CBA’s home loan rates are up by 0.25% between the two hikes.

That, as you probably know, is what the RBA is expected to cut interest rates by. If indeed it decides to in the near future. The likelihood is that it will, soon or later. Markets are pricing in a 0.25% rate cut in November at 57%. That’s up markedly on this time last month. And it largely reflects this wave of home loan rate hikes across the banking sector.

Should that happen next month, loan rates across CBA mortgages would fall back to original levels. And CBA customers would find themselves in the same position prior to the home loan rate hikes.

Meanwhile, Westpac’s total home loan rate increase, at 0.33%, is higher than the other banks. That has to do with the fact that its capital ratios are smaller by comparison. And it means that Westpac’s home loan rates are likely to remain high.  With or without any rate cuts on the part of the RBA.

It’ll be interesting to watch where banks take things from here. Should interest rates fall to 1.75%, it would offset many of the changes banks have made to their lending rates.

But their need to raise further capital suggests that they’ll have to go that extra step. That would imply that home loan rate hikes among the big banks has only just begun.

Mat Spasic,

Contributor, The Daily Reckoning

PS: Rising home loan rates will dampen housing demand in the long run.

The rate of house price growth is already slowing. As are rental yields. With population growth on the wane, and housing supply on the rise, it all points to a volatile future for the market.

Should the housing market turn to bust, the economy won’t be far behind.

The Daily Reckoning’s Greg Canavan warned us of this earlier in the year. As one of Australia’s leading investment analysts, Greg says we’re heading towards our first recession in 23 years.

In a free report, ‘Australian Recession 2015: Unavoidable’, Greg reveals how we’ve found ourselves in this position.

But there is a silver lining. There are actions you can take now to lessen the blows of the coming recession.

Download your free copy today to learn how to protect your wealth from the coming crash. To find out how to download his free report right now, click here.

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