Source: David McBee from Pexels.
  • Westpac warns: 45% of it's $471 billion in home loans will see interest rates rise.
  • 1/3 of these accounts are more than 12 months ahead on repayments.
  • Analysts expect this to change in late 2023 - 2024 as funding costs get tougher.

Westpac has warned that almost half of its $471 billion in home loans were taken based on interest rate buffers that are set to be exceeded as the RBA continues to hike the official cash rate.

The bank stated that $212 billion of its home loans, or 45 per cent, were made assuming interest rates will end up at a lower level than they will be once the RBA finishes its rate-rising cycle.

Westpac also pointed to the fixed rate refinancing “cliff” as being prolonged, saying $56 billion of fixed-rate loans will expire in the second half, and a further $57 billion in 2024, then $30 billion in 2025.

The looming breach of bank serviceability buffers is a big test for the banking sector’s broader lending standards, and as official rates continue to rise, customers will be making higher repayments than banks expected when they issued the loans.

The low rates days

Between August 2019 and June 2022, Westpac had originated $212 billion of mortgage loans using a serviceability buffer of between 2.5 per cent and 3 per cent, added to the market interest rate offered by the bank at the time.

However, the cash rate has jumped from a record low of 0.1 per cent last May to 3.35 per cent in February, above the top end of the buffer, and Westpac economists forecast it to peak at 3.85 per cent.

Customer diligence rewarded

Westpac provided some assurances in its disclosures, stating that one-quarter of customers whose mortgages were originated during this period have seen no change to their repayments, as they were already ahead, and one-third of these accounts are currently more than 12 months ahead with repayments.

But for those customers ahead on mortgage repayments by less than a year, representing $159 billion of the mortgage book, $13.4 billion have a loan-to-value (LVR) ratio of 80 per cent or more, $7 billion is over 85 per cent LVR, and $3.5 billion has an LVR of more than 90 per cent (meaning their equity will be wiped out if property prices fall by another 10 per cent).

Time to cut the buffer rate

CBA CEO Matt Comyn also said it would be appropriate for APRA to revisit the serviceability buffer settings at the time the official cash rate peaks.

Mr Comyn said, “That setting has been appropriate.

“We do think it will be worthwhile reviewing that, as we get close to or at the top of the interest rate cycle.

“That has seen a reduction in borrowing capacity, but that hasn’t been unhelpful overall as there have been lower levels of higher debt-to-income loans in the market.

“But it will be prudent at the appropriate time, over the course of the year, to review that setting” he said.

ANZ CEO Shayne Elliott said last week that his bank was also breaking through the buffers set when the floor was dropped as interest rates rise above the level of the regulatory buffers.

For now, bad debts at the banks remain very low, but analysts are expecting tougher times in the second half of the calendar year and through 2024 as loan arrears and funding costs rise.

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