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Home loan interest rates

Westpac's decision to pass through the full amount of the official interest rate increase to its variable rate mortgage loans and most business loans is surprising, especially as it has not yet announced any increase in its retail deposit variable rates.

The Government accepted at the time of the announcement of the increase in official rates that they would eventually impact on lending rates for both housing and business.

However, the expectation was that given the current margins on home lending and the competitive nature of the home lending market, the increase in official rates would probably not be fully reflected in bank lending rates.

The size of any increase in variable rate mortgages is a matter for the commercial judgement of individual banks after taking into account the extent to which the increase in official rates has flowed through to their cost of funds, and the current margins they are earning, particularly on home lending.

Whatever decision is made by the other banks, home buyers would be well advised to take the Reserve Bank's recent advice to shop around for the best deal, particularly as an increasing number of insurance companies and specialised mortgage brokers are now entering this market.

Home buyers can be assured that despite the increase in mortgage rates, maintenance of low inflation will ensure that housing remains very affordable.