Australia's higher mortgage rates likely to hurt cosumer confidence

Australian local banks have raised extra capital in the past two months following actions by Australia's regulators in July to set aside more capital against potential mortgage loan losses. This followed a bank review and stress tests in November 2014.

The regulator set a deadline of July 2016 for banks to increase cash reserves (risk weight) on Australian residential mortgage exposures from 16% to at least 25%.Following on from this, Westpac last week decided to raise additional funds by bumping up its variable mortgage rate by 20bp from the middle of November. 

"Fixed rates will stay unchanged, but other lenders may be tempted to soon follow. Rising mortgage servicing costs could of course hurt consumer confidence, dampen private consumption, and result in a lower growth trajectory fort the Australian economy, which is still adjusting to the end of the supercycle in commodities and a structural slowdown in the Chinese economy", says Westpac.

Separately, the RBA warned in its bi-annual Financial Stability Review (FSR) that lending standards for home loans have been looser than first thought. It adds that this may pose risks if a downturn materialises in the housing market. It welcomed the recent tightening of standards by the regulators and said that this has helped to cool home prices.