Lender lifts home loan rates by 20bps

Virgin Money has announced changes to its home loan interest rates, with variable rates for all existing principal and interest (P&I) and interest-only (IO) home loans to increase by 20 basis points, effective Friday, 11 January.

However, the lender noted that the majority of its standard variable rates for new home loan applications will remain unchanged, with only a few set to increase.

Virgin Money’s general manager, lending, cards & deposits, Johnny Lockwood, attributed the decision to the continued rise in wholesale funding costs.

“The decision to increase interest rates is never easy,” he said.

“We have absorbed higher funding costs for the last 12 months in order to delay the impact for our home loan customers.

“Unfortunately, funding costs remain high and are likely to remain elevated into the foreseeable future.”

Virgin Money’s rate hike follows a move from the Bank of Queensland (BOQ) to increase its mortgage rates by up to 18 basis points, with HomeStart Finance also recently announcing an interest rate rise of 15 basis points on its Seniors Equity loan product. 

Throughout 2018,  several lenders, including three of the big four banks, increased rates out-of-cycle, also citing the rise in funding costs.

Speaking to Mortgage Business, principal of DFA Martin North said that he expects mortgage stress to continue mounting in the short to medium term, particularly off the back of out-of-cycle interest rate hikes from lenders, with the Bank of Queensland (BOQ) the latest bank to lift home loan rates (up to 18 basis points).

“My expectation will be that we would continue to see the same sorts of trends that we’ve seen in the past year or so,” Mr North said.

“Interest rates probably will rise, so we’ve had the Bank of Queensland lift rates a couple of days ago. And my expectation is that other banks will have to lift interest rates, because they’ve got margin pressure at the moment because funding costs are a lot higher.”

Mr North added that even small rate rises could push more households into mortgage stress and heighten risks of default for borrowers already in mortgage stress.

“A lot of households are very close to the wind at the moment, so even small changes in cash flow will have a significant impact,” he continued.

“[Even] an 18-20 basis point increase in mortgage rates is enough to tip a few more people over into stress. It will not have a massive impact, but it will certainly push more [borrowers into mortgage stress].

“The other point is that it will actually tip more borrowers into severe stress, that’s when you’ve got a serious monthly deficit. That’s the leading indicator for default 18 months down the track.”

However, despite hiking its variable mortgage rates, Virgin Money also announced it is reducing fixed rates by between 5 basis points and 10 basis points for the following products:

• Two and three-year fixed rates for owner-occupier principal and interest loans over $300,000 with an LVR of 90 per cent and under.
• Two and three-year fixed rates for investment interest-only loans with an LVR of 90 per cent and under.

 [Related: Lender announces mortgage rate hikes]