Spiralling mortgage rates see Westpac's earnings from interest up $1.2 billion

Monday, 22 May 2023

Borrowers have been paying Westpac much more interest following home loan rate rises

Westpac has become the second of the big four banks to reveal the scale of the increase in interest paid to it by borrowers due to mortgage rate rises.

The bank’s interest income was $2.85 billion in the six months to the end of March, its newly-released disclosure statement shows.

In the same period in the previous year, Westpac’s interest income was $1.61b.

The publication of Westpac’s disclosure statement follows ANZ’s, which showed it had collected $4.67b in the six months to the end of March, up from $2.454b in the same period in the previous year.

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The rises came despite the size of the two banks’ books of home and business loans barely changing, indicating the increase was the result of borrowers paying more for each dollar they owed.

Home loan rates have risen sharply since late 2021 as the Reserve Bank Te Pūtea Matua lifted the official cash rate (OCR) in a bid to slow the economy, and bring down inflation.

A series of 11 increases in the OCR from 0.25% in August 2021 to 5.25% has been followed by home loan rate increases by banks, resulting in rising interest bills for households.

So fast have the rises in home loan rates been that they now exceed the rates many borrowers who bought at the peak of the market were stress-tested at, according to a report from the Reserve Bank.

The pressure on households is forecast by banking analysts at global financial research company S&P to lead to an increase in households failing to pay their home loans.

In March 2022, the average “special” interest rate on a one-year fixed term home loan to a borrower with at least 20% equity in their home was 3.93%, according to Reserve Bank data. In March 2023, it was 6.5%.

Not all of the extra interest being collected from borrowers by banks is kept by banks.

They have had to pay more to depositors and other funders who they borrow money from in order to be able to make loans.

In the six months to the end of March 2022, Westpac paid $526m in interest to its creditors, including households who had money on deposit with them.

That had risen to $1.55b in the six months to the end of March 2023.

Westpac’s economists expect the Reserve Bank to increase the OCR on Wednesday.

“We expect the Reserve Bank to increase the OCR by 25 basis points to 5.5% and signal further increases in the next couple of meetings. Risks of a 50 basis point increase to 5.75% are significant and can't be ruled out,” said economists Kelly Eckhold and Michael Gordon.

The economists have the OCR forecast to peak at 6%.