Mortgage rate fight heats up but for once businesses escape the worst

The major banks have gone head to head after NAB undercut Westpac’s 45-basis point increase with a modest 25-point increase of its own, but business borrowers have escaped with just a 25-point increase.

The rise comes as the gap between variable mortgage rates and business lending rates is expected to close over the next year, an industry expert says.

Westpac shocked the market earlier this week by announcing a 45-basis point increase on its variable mortgage rates to 6.76%, effective from today, just hours after the Reserve Bank announced its decision to lift the official cash rate to 3.75%. Treasurer Wayne Swan attacked the bank for quickly lifting rates so high above the RBA’s movement.

NAB quickly undercut the rise, increasing its variable home mortgage rate by 25 basis points to 6.49% – a full 27 basis points under Westpac’s current rate.

However, businesses have been given some relief from the worst of the interest rate pain with both banks announcing just a 25 basis point increase in business lending products. NAB’s business lending rate will increase to 7.93% effective from Monday, while Westpac’s rate will increase to 7.94%.

The move is a welcome one for businesses, who have seen their lending rates increase at a higher rate far higher than the banks’ variable mortgage products. Some have accused the banks of pandering to demand from first home owners and refusing to help struggling businesses, but this latest rise indicates some assistance to SMEs.

Cannex Canstar analyst Peter Arnold says the gap is tightening between variable home mortgage rates and business lending products, and expects the two rates to become closer over the next year.

“As conditions improve we expect to see that gap tighten up. Perhaps not over the next few months, but certainly over the next year or two years things are going to appear much better on that lending front.”

Arnold says the gap between the two rates is due to the risk associated with business lending, but expects that risk to ease as economic conditions improve.

“Without a doubt, as far as the last couple of years goes, I’ve tracked these rates against the last couple of years and there has been a margin above mortgage rates for businesses. Then we saw a widening of the gap last September, and there has been a bit of a lag since then with a significant gap between residential and small business loans.”

“One big factor associated with these business loans is that times are tougher for small businesses and there is a very big risk profile associated with that. They are riskier to lend to, and over the last 18 months we’ve seen higher default rates for SMEs. That’s the main reason these rates have been passed on at a higher rate than to mortgage rates.”