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Oh Oh. National Australia Bank Ltd raises interest rates on its home loans

National Australia Bank Ltd (ASX: NAB) has announced that it is increasing interest rates on home loans for both investors and owner occupiers.

The rise aren’t much, owner-occupiers will see the standard variable rate rise from 5.25% to 5.32%, while investors will see rates rise from 5.55% to 5.80%. But what is significant is that owner occupiers are also getting hit this time.

NAB Chief operating officer Antony Cahill cited intense competition, increasing regulation and elevated funding costs as reasons for the bank to raise interest rates. Most notably, the US Federal Reserve raised interest rates overnight, likely increasing NAB’s wholesale funding costs.

What is concerning for property lenders is that the Federal Reserve is likely to continue increasing interest rates this year – which will add more pressure onto Australian banks’ funding costs.

It shouldn’t surprise anyone if the rest of the big four Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) follow the NAB’s lead in the next few days or weeks and raise interest rates.

Interestingly, NAB has lowered its two-year fixed rate for first home buyers to 3.69% – the lowest home loan rate ever offered by the bank. NAB will also recognise rental history as a form of ‘genuine savings’ in home loan applications to help first home buyers.

Investors have again overtaken owner-occupiers as the largest percentage of property loans, while first home buyers continue to dwindle, falling another 0.4% in January 2017 to 13.4% according to the latest data from the Australian Bureau of Statistics.

Foolish takeaway

There’s no doubt that life is about to get tough for heavily indebted property investors. It’s clear the banks have them clearly in their targets when it comes to clawing back their funding costs, and with the regulators worried about rising house prices.

What the banks will have to be careful of is that they don’t accidentally kick off a housing price crash by pushing investors over the edge.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.