Sold off! Will the National Australia Bank Ltd. share price recover?

The National Australia Bank Ltd. (ASX: NAB) share price slumped 2.44% yesterday.

The NAB Share Price

Source: Google Finance

Source: Google Finance

What happened?

Yesterday, NAB sent shockwaves through the banking sector by increasing interest rates on both investor loans and owner-occupier loans. Investor loans will rise from 5.55% to 5.8%, while homeowners will see their loans increased from 5.25% to 5.32%.

On a 30-year $300,000 loan, monthly repayments for investors increase from around $1,712 per month to $1,760. While that may not sound like much, it’s what happens next that has the market so concerned.

NAB executive, Antony Cahill, said regulation, competition and higher funding costs forced their hand.

As my colleague, Mike King pointed out yesterday, “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.”

Chances are, Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) will follow NAB’s lead.

What does the Federal Reserve have to do with my mortgage?

The major banks fund their loans with term deposits. But they also fund their loans from ‘wholesale debt markets’, mostly in the US. They go into the US debt market, ask for funds and lend it back to mortgagees at home. With the Federal Reserve raising interest rates, it forces the entire debt market to move their rates upwards. Meaning higher interest rates on your loan.

Foolish Takeaway

The NAB share price has been on a rollercoaster ride over the past few years but is up 14% since this time a year ago. The big question over all bank shares is what next for house prices. If interest rates on loans rise too quickly it could stall house price growth.

However, it’s also important to remind ourselves that it wouldn’t be the end of the world. Sensationalism is the name of the game in the media and much of the time the perception of change is worse than the change itself. Keep your cool, don’t get in over your head with debt and keep a cash balance in an emergency fund.

Then, go on the offensive (see below).

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes and encourages your feedback. You can follow him on Twitter @OwenRask.

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.

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