Bank home loan rates start lifting – are business rates next?

Business lending rates offered by banks could be next to rise after Adelaide Bank became the first bank lender to increase some of its home loan rates in response to the credit squeeze on international financial markets.

Adelaide Bank yesterday announced plans to increase the variable rate on its low-doc loans by 30 basis points (0.3%) from next month in addition to the recent Reserve Bank led 25 basis point rise, the Australian Financial Review reports.

Recent turmoil on financial markets caused by escalating defaults in the US sub-prime mortgage market has made it more expensive for financial institutions to obtain funds to back their loans. Non-bank lenders such as RAMS and Bluestone Group, which tend to be more exposed to riskier low-doc loans, were the first to increase rates, with Adelaide Bank the leader.

“Our cost of funding these loans has gone up … we’re absorbing some of that and we’re passing some of that on to consumers,” Adelaide Bank chief executive Jamie McPhee told the newspaper.

The announcement closely follows the comments yesterday of Reserve Bank of Australia deputy governor Ric Battelino, who said banks could soon be forced to pass on to consumers the increased cost of obtaining finance on international markets.

Adelaide Bank’s move could open the way for the rest of the banking sector to increase some rates, according to Ian Rogers, the editor of banking industry publication The Sheet.

“A lot of lenders will be happy Adelaide bank has provided the lead, even if only in one class of loans, but I’d expect borrowing rates in general to go up and that’s because cost of funds across the board is up,” Rogers says.

Although the focus up until now has been on the bigger mortgage lending market, Rogers says the international credit squeeze is also likely to send business lending rates higher.

“The cost of funding for everyone is higher this week than a month ago because of the current phase of the credit squeeze; that means the final price to business borrowers is going to go up at some stage. The only issue is how much, when and which bank,” he says.

And not only could business loans become more expensive; some business owners could find it even harder to get finance at all – and SME owners are likely to be the first to feel the squeeze.

Rogers says business lending could soon follow the low-doc home loan market, where some lenders are already finding it harder to get finance as banks tighten up lending criteria.