Sept. 2 (Bloomberg) -- Australia's four biggest banks will cut interest rates for variable home loans after the central bank reduced borrowing costs, giving homeowners relief in a nation where housing affordability is at a 22-year low.

Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd., Commonwealth Bank of Australia and Westpac Banking Corp. will pass on the Reserve Bank of Australia's full 25 basis point interest-rate cut to customers, they said.

``The banks have been under enormous political and public pressure to follow suit,'' said Troy Angus, who helps manage A$3.6 billion ($3.1 billion) at Paradice Investment Management in Sydney. ``They can afford to cut their rates by 25 basis points because the immediate upward pressure has been relieved. In the longer term, the banks still face higher funding costs, which they will have to pass on to their customers.''

Banks have been under pressure from Treasurer Wayne Swan and Prime Minister Kevin Rudd to match the central bank's reduction after mortgage holders withstood 12 increases in seven years. The five largest lenders including St. George Bank Ltd. increased their mortgage rates at a faster pace than the central bank this year as the global credit squeeze pushed funding costs higher.

Reserve Bank Governor Glenn Stevens today lowered the benchmark interest rate by a quarter point from a 12-year high to 7 percent, as predicted by 22 of 23 economists surveyed by Bloomberg News.

Rate-Cut Schedule

ANZ, the nation's fourth-biggest bank by market value, said in an e-mailed statement its standard variable home loan rate will drop to 9.37 percent from Sept. 8. Commonwealth Bank, the biggest provider of home loans, will reduce its base rate to 8.82 percent on Sept. 8, it said in an e-mailed statement.

Westpac, the second-biggest bank by market value, will reduce its rate to 9.36 percent on Sept. 4, spokesman David Lording said. National Australia, the largest by assets, will cut its rate to 9.36 percent on Sept. 5, spokesman Brandon Phillips said. St. George will lower its rate to 9.37 percent on Sept. 29, according to an e-mailed statement.

Almost 90 percent of Australian borrowers have variable-rate mortgages, which typically move in lock-step with changes in central bank rates.

Payments to Drop $42

Today's cut will reduce repayments on an average A$250,000 home loan by A$42 a month, according to the Real Estate Institute. A report yesterday showed households spent 39.8 percent of their incomes on mortgage payments in the June quarter, the most in the 22 years the institute has measured affordability.

``ANZ understands higher interest rates are stretching many household budgets,'' ANZ's head of personal lending Brian Hartzer said in a statement.

National Australia rose 0.6 percent to close at A$24.80 in Sydney trading. Commonwealth Bank climbed 1 percent, Westpac gained 1.5 percent, and ANZ added 1.9 percent.

The seven-company S&P/ASX 200 Banks Index has dropped 28 percent this year as the nation's lenders posed slowing earnings growth and said funding costs will remain high. They have been the hardest hit in the Asia-Pacific region by the credit turmoil.

Commonwealth Bank posted the slowest profit growth in four years last month as bad debts doubled. ANZ forecast its biggest profit decline since 1992 in August, while National Australia boosted provisions fivefold for possible securities losses.

The five largest lenders have raised their interest rates for variable home loans by an average of 105 basis points this year before today's cut, as the credit crisis pushed funding costs higher. By contrast, the Reserve Bank added 50 basis points. A basis point is 0.01 percentage point.

`Not Yet Out of the Woods'

The nation's one-month bank bill swap rate, which banks typically use to determine yields on variable-rate loans, reached a 13-year high of 7.80 percent on June 11. It has since dropped to 7.2 percent, the lowest since February.

``Medium and long-term funding, along with our retail deposit base, represents the greatest proportion of our funding costs, and while the average cost of this funding continues to increase, it means we are not yet out of the woods,'' Ahmed Fahour, head of National Australia's domestic business, said in a statement.

The government wants to increase competition among banks to lower home-loan costs, with new rules to be introduced in November to make it easier for customers to switch their mortgages to other lenders.

The four biggest banks, barred from acquiring or merging with each other under the government's so-called Four Pillars policy, are looking to buy smaller rivals to grow. They are benefiting as non-bank lenders struggle amid rising wholesale funding costs. Westpac agreed in May to buy St. George to create the country's biggest lender by assets after National Australia.

Commonwealth Bank bought a 33 percent stake last week in non-bank mortgage provider Aussie Home Loans, without saying how much it paid for the ``strategic investment.''

In November, Rams Home Loans Group Ltd. sold its brand and branch network to Westpac for A$140 million after failing to refinance more than A$6 billion in short-term loans.

To contact the reporter for this story: Stuart Kelly in Sydney skelly22@bloomberg.net

Last Updated: September 2, 2008 03:05 EDT