Westpac chief executive Brian Hartzer has been grilled in Canberra over the bank’s move to hike interest-only mortgages, with parliamentary banking inquiry chair David Coleman asking if the lender was using new regulations as an excuse to increase profits.
Westpac, like rivals, in June increased rates on interest-only loans, and justified the move by pointing to the Australian Prudential Regulation Authority’s cap on new interest-only lending at 30 per cent of new flows.
Young Australians’ home loan hangover
Mortgage debt on primary residences among young Australians almost doubled between 2002 and 2014, according to the latest release of the Household, Income and Labour Dynamics in Australia (HILDA) Survey.
Mr Coleman repeatedly queried why the 0.34 percentage point rate hike applied to existing customers, given that APRA’s restriction only applied to new loans.
He noted analysis from Morgan Stanley that suggested Westpac and other lenders would make much higher returns from interest-only loans as a result of the hike.
While banks have explained the rate rises by pointing to APRA’s regulation, Mr Coleman put it to Mr Hartzer that “what the underlying numbers suggest is that compliance is being used as a profit centre.”
In response, Mr Hartzer insisted the bank’s main objective in hiking interest-only loan rates was to give customers a strong incentive to start paying back principal at a time when borrowing costs are still low. Using pricing models was also better than denying credit to customers who wanted interest-only mortgages, he said.
When Westpac hiked interest-only rates, it also cut rates on principal and interest loans to give people an incentive to switch to paying down their debt.
“We have to reach this 30 per cent cap as we understand it and we want to reshape our balance sheet so that customers are oriented towards paying down principal because rates are low,” Mr Hartzer said.
Brian Hartzer chief Westpac appeared before the House Economics Committee at Parliament House in Canberra on Wednesday. Photo: Andrew Meares
The number of customers switching to principal and interest loans had jumped 70 per cent in the latest quarter, he said, which dampens the boost to profitability from the interest-only rate hike.
It comes as the competition watchdog is carrying out a review of banks’ mortgage pricing – and Mr Hartzer indicated the bank had already handed over large numbers of documents to the inquiry.
Mr Hartzer said Westpac had updated its internal financial forecasts as a result of the rate hikes, but said boosting profits was not its objective.
“Of course we update our forecasts financially as a result of these changes, not the other way around,” Mr Hartzer said.
Switch to a principal and interest loan, it’s cheaper.
Westpac CEO Brian Hartzer
He said his advice to customers who were upset at having their interest-only loan rate increased was to “switch to a principal and interest loan, it’s cheaper.”
Westpac is the country’s largest lender to customers with interest-only loans, which made up about 50 per cent of its mortgages at the latest results.
Mr Hartzer has also faced questions from Labor MP Matt Thistlethwaite over the money laundering allegations at CBA, after it was reported some of the syndicates that allegedly washed money from CBA also used Westpac and ANZ Bank to wash funds.
Mr Hartzer said he was not aware of lawyers seeking details from Westpac through discovery.
The Australian Securities and Investments Commission on Wednesday also said a review of interest-only lending by banks had found the major banks had curbed interetst-only lending in the past year, and it would now conduct file reviews.
Banks must have a “reasonable” basis for suggesting interest-only loans, ASIC said.
“The spotlight has been firmly on interest-only lending for some time, and there are no excuses for lenders and brokers not meeting their legal obligations,” ASIC deputy chairman Peter Kell said.