The Motley Fool

Bank of Queensland Limited lifts home loan rates in warning shot to property investors

Australian property prices may come under more pressure after Bank of Queensland Limited (ASX: BOQ) announced it is to lift interest rates on variable owner occupier loans by 0.09%, with interest only and investor variable rates to lift by 0.15%.

“Funding costs have significantly risen since February this year and have primarily been driven by an increase in 30 and 90 day BBSW rates, along with elevated competition for term deposits.

While the bank has absorbed these costs for some time, the changes announced today will help to offset the ongoing impact of the increased funding costs,” commented the regional lender’s group executive of retail banking Anthony Green.

These rate hikes are effectively out of cycle as the Reserve Bank’s official cash rate has remained unchanged at 1.5% for around 18 months and if the major commercial lenders like National Australia Bank Ltd (ASX: NAB) or Westpac Banking Corp (ASX: WBC) decide to lift variable lending rates as well more pressure will come on Australia’s already softening residential house prices.

The core way Aussie banks turn a profit is by making more on what they lend, than they pay on what they borrow, with the net interest margin being the effective profit spread between lending and borrowing rates.

Banks also tend to borrow short term (in the BBSW or other retail / wholesale funding markets for example) and lend long term (on housing for example) which means they have ample opportunity to increase profitability by adjusting lending rates, or the rates they pay on borrowings by cutting retail deposit saving rates for example.

Moreover, the major banks have a cartel-like grip on home loan lending due to the lack of competition and tend to move as a herd in terms of out-of-cycle rate hikes as none want to become uncompetitive, but will happily lift rates if they believe they can get away with it.

In a way this is good news for bank investors, but bad news for residential property investors as we may have reached the bottom of the lending rate cycle and top of the credit growth cycle.

The Royal Commission into banking is also likely to lead to tightening lending standards, with greater checks on the monthly expenses of home loan applicants being introduced.

All this paints a relatively gloomy picture for property prices in the years ahead, with falling prices also acting as a weight on the book value and share prices of banks. However, the outlook for bank shares is not all doom and gloom, with the flat property markets arguably already priced into their valuations.

4 Stocks for Building Wealth After 50

Renowned investor Scott Phillips just released a brand-new report detailing his 4 favourite stocks to buy right now.

And I don’t know about you, but I always pay attention when some of the best investors in the world give me a stock tip.

This is your chance to get in at the very beginning of what could prove to be very special investments.

Click here to get started today!

Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.