Westpac has said that their recent capital raising, and this rate hike are in reaction to the recent regulatory changes. On July 20th, APRA increased the capital adequacy requirements for residential mortgage providers which use the Internal ratings-based (IRB) system of credit risk. Several banks, including Westpac reacted to this announcement in August, and made changes to their residential investment lending policies.

A higher capital requirement, means that lending becomes less profitable. Falling profits make shareholders unhappy. Westpac is protecting shareholders at the expense of their home loan customers. They may be the first bank to make such a move, but we doubt they will be the only one. CBA, NAB, ANZ and Macquarie also use the IRB system, and we expect they too will soon make moves to keep their own shareholders happy.

We expect the Australian mortgage market will continue to change over the coming months. Unfortunately for borrowers, we don't think lending will be getting any easier or any cheaper. Relief might come if the RBA decides to cut the official cash rate for a third time. However as we know, banks don't always pass on rate the full rate cut.

How Will Borrowers React?

Westpac is the first lender to announce an increase in variable rates. The change will only be effective in 6 weeks. This gives their customers some advanced warning, and time to react. Many will be tempted to refinance to other banks. The risk in refinancing, is that the bank you move to, might also increase their rates. Maybe it's a good time for customers to lock in all or part of their mortgage with a good fixed rate. The advantage of a fixed rate is that the banks can not alter the rate during the fixed period.