Commonwealth CFO Downplays Interest Rate Effect on Mortgages

  • Customers had home-loan rates up to 4% above current levels
  • Home-price concern building since banks raised mortgage rates

Australian home owners can withstand a rise in interest rates, Commonwealth Bank of Australia’s chief financial officer said, as he sought to ease concerns about the effect of any downturn in the property market on the country’s mortgage borrowers.

Even a 1-percentage point increase in mortgage lending rates would not affect a majority of the bank’s customers as they had set their repayment amounts when rates were as much as 4 percentage points higher than they are now, David Craig, CFO of the country’s largest mortgage lender, said in an interview Tuesday at Bloomberg’s Sydney office.

“Just having interest rates go up is not the cause for hardship for very many people,” Craig said, after making a speech at the Bloomberg Summit earlier in the day that focused on innovation and technology.

Concern about Australian house prices has been building after lenders, including Commonwealth Bank, raised mortgage rates by as much as 20 basis points last month to meet higher capital requirements. Sydney’s auction clearance rate dropped o the lowest in almost three years last week, indicating softening buyer demand in a city at the epicenter of a property boom that had driven prices to record highs.

Despite previous reductions in borrowing costs over the past few years, most of Commonwealth Bank’s customers had left their repayment levels unchanged, resulting in higher principal repayments on their mortgages, Craig said.

“So 80 percent of our customers are paid off to some degree in advance,” Craig said. “There’s an enormous prepayment that’s happened in the economy, which puts home-owning Australia on the whole in pretty good shape.”

House Prices

Craig said it’s “inevitable” that Australian house prices will flatten or even ease back a little, but it would require a substantial increase in the country’s unemployment levels for borrowers to experience real hardship.

“Australians want to own and hang on to their house,” Craig said. “I hate to say this but, they almost start eating lower-quality meals before they start to think about not paying off their house.”

Commonwealth Bank raised A$5.1 billion in August and September after regulators increased the capital requirements for mortgages. Craig said it was unlikely that the requirement will rise further, as Australian lenders now hold about four times the capital against their mortgages when compared with some overseas lenders.

Improved Confidence

Craig said earlier that business and consumer confidence has increased after a change in prime minister and there has been a slight “uptick”in business credit. Australian companies will need to increase spending after years of under-investment, he added.

Business credit grew in September at the fastest pace since February 2009, helping underpin the Reserve Bank of Australia’s stance that parameters for growth in investment are now in place as it holds its benchmark interest rate at a record-low 2 percent. The measure has lagged behind home-loan growth for almost seven years, RBA data show.

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