Westpac has bumped up its home loan rates in a blow to millions of Australians with a mortgage.
Westpac will raise variable home loan rates by 0.14 percentage points, effective from September 19, due to an increase in its wholesale funding costs.
Australia's central bank has kept the official cash rate at a record low 1.50 per cent since 2016 and signalled a steady path for some time.
Westpac on Wednesday said it's variable mortgage rate for owner-occupier properties will increase to 5.38 per cent per annum for customers with principal and interest repayments, while the rate for residential investment properties will go up to 5.93 per cent.
The rise is expected to add about $400 a year to repayments on a $400,000 mortgage.
But the bank needs to be able to justify the lift in rates, Australian Treasurer Josh Frydenberg said.
“My view is it’s up to the bank to explain to the Australian people why it lifted rates," he said in a statement.
"Any financial institution which makes these decisions needs to explain to its customers why.”
Shares in the lender reacted to the news. By 1532 AEST, Westpac shares had risen to $28.90, up 2.8 per cent, from $28.39 just before the announcement at 1500 AEST.
Shares in other major banks also moved higher, taking the S&P/ASX 200 financials index up 1.5 per cent in afternoon trading.
Westpac CEO Brian Hartzer said the bank made the “difficult” decision due to sustained higher wholesale funding costs.
"These decisions are always difficult, particularly when you’re impacting the cost of living for people, and we’re very conscious of that," he said.
"We recognise that part of our job is to accept the volatility that comes in financial markets around our funding costs. So when wholesale borrowing costs started rising back in February, we absorbed that and we took the view that hopefully, the elevated costs would go back down. Unfortunately, they haven't and they have continued to rise.
"We've come to the conclusion that what we're looking at is a sustained increase in that key benchmark wholesale funding cost rate."
Sally Tindall, research director at financial comparison website RateCity, said Westpac had held out longer than the market expected.
“Westpac has today asked their variable rate home loan customers to help ease their cost of funding pressures," she said.
“While banks are entitled to make a profit, some Westpac home loan customers will be disappointed with the bank’s decision to increase their interest rate.
“Most households will be able to absorb the rate hike, however anyone who overstretched to get in the market will feel burdened by this extra cost.
“Now that Westpac has hiked, taking the brunt of the bad PR, we expect the other three banks to follow suit."