It is “well possible” that local commercial banks could introduce increases in their interest rates to pass on the cost of the European Central Bank’s rate-rising cycle, the chief executive of APS bank has warned.
Marcel Cassar told Times of Malta that banks are under increasing pressure to react to the ECB’s rates hike in a move that would impact home loan holders.
Most Maltese home loans are based on a variable interest rate, meaning that a rise in interest rates would make their monthly payments more expensive.
Last month, HSBC Malta, which backtracked on a move to increase its home loan down payment minimum to 20 per cent, also raised its interest rate on home loans by 30 basis points from 2.65 per cent to 2.95 per cent.
When asked about the possibility of other local banks following suit, Cassar said that, in an environment of rapidly rising rates, banks will be increasingly under pressure to “react or pass on” sooner or later.
“While I cannot comment on the specific decision of HSBC Malta, which also forms part of a global banking group, market trends are very evident,” Cassar said.
“In fact, data from the European Central Bank’s January eurozone bank lending survey shows how rising interest rates and declining consumer confidence are taking a toll on the property market with demand for housing loans decreasing at the fastest pace on record since 2003.”
While the likelihood of how or when local banks may raise their rates is difficult to predict, Cassar said that most banks will have different models of raising deposits and targeting new account segments.
“They may do so by increasing their interest rate offerings which then raises their cost of funding, leading them to consider how much of this they can absorb or pass on to their borrowers through higher pricing. It’s a circle and a cycle,” he said.
“They are the dynamics of our business and we had become too used to low, or negative, interest rates staying flat for years.”
Cassar said that “plain and simple” it would make borrowing more expensive.
“Certain banks may also decide to tighten their lending criteria and requirements for home loans, as the repayment power of impacted borrowers gets squeezed,” he said.
“Steeper borrowing terms for home loans can also have the overall effect of dampening consumer confidence.”
After the ECB announced plans to raise its rates in July, it was understood that Maltese banks would largely not be impacted by this decision.
However, Cassar said that since then the ECB has increased its deposit rate by 300 basis points from -0.5 per cent to 2.5 per cent, making it “the largest and fastest increase in rates in the monetary union’s history” with another increase expected later this month.
“These are hefty rises by any measure even if their effect has not yet made its way to the Maltese economy. To think that we had been used to negative interest rates for eight years,” he said.
'Simply a matter of time'
BOV has not closed the door on raising interest rates, previously saying in response to the HSBC increase that the bank “has at this point in time no intention to change any of the terms and conditions of its home loan products”.
Financial adviser John Cassar White told Times of Malta that when the ECB raises its rates, it is “simply a matter of time before commercial banks follow suit”.
While a rise in local interest rates is to be expected, Cassar White said, this will likely vary from bank to bank, depending on their business model.
“A bank that seeks to widen its mortgage portfolio may offer more favourable rates than its competitors but will still adopt prudent criteria for lending,” he said.
Asked whether this is likely to impact first-time buyers and people with a home loan, Cassar White said that interest rates are only a “small part” of the picture when it comes to the terms of a loan.
Factors such as income, age, sustainability of employment of loan applicants and the price of property all factor in for consumers when it comes to the affordability of a mortgage.
“Banks calibrate their lending criteria according to their risk appetite but all follow criteria based on prudence.
“The amount lent does not depend only on the initial minimum deposit but on a general assessment based on all the other lending criteria,” he said.
Cassar White added that it is not “realistic” to anticipate interest rates to return to the level they were from 2008 up to a year or two ago.