Westpac Bank is charging higher interest rates on mortgages to people who have less than a 20% deposit.
Retail bank general manager Ian Blair said the differential pricing was in response to the Reserve Bank restrictions on bank lending to people with small deposits which came into effect in October.
The bank had dropped its floating mortgage rate to 5.64% for people with more than a 20% deposit but those with less would have to pay 6.24% - Westpac's previous floating rate for all borrowers. For fixed mortgages, borrowers with less than a 20% deposit would pay 6.55% interest for two-year mortgages compared with the 5.59% fixed mortgage rate offered to those with larger deposits.
Mr Blair said the Reserve Bank restrictions on high loan-to-value-ratio (LVR) lending had been a moving feast and a difficult process not just for Westpac but for all banks.
"But we're there now and we've been going through a process of understanding where the demand is going to lie, understanding the new lending environment that we're in in LVR," he said.
"Really, the move is designed to ensure that we provide complete transparency to our customers and potential customers as to what the price of borrowing is going to be."
Demand for high LVRs had dropped but was still greater than the banks were allowed to supply, Mr Blair said.
Philip Macalister, who publishes the GoodReturns website and specialist publication The Mortgage Mag, said it made sense for banks to charge higher interest rates to people with small deposits because low-equity loans were seen as risky - despite no evidence to support that.
"But secondly, what's happening is the Reserve Bank's restrictions are actually driving the banks to really push hard on their high-equity borrowing, so that's the people with the 20% deposit or more," Mr Macalister said.
As those loans grew, banks could do more low-equity lending, so the Reserve Bank restrictions had effectively encouraged banks to ramp up their lending activity.
As well, two-tier pricing such as Westpac's meant the bank got far better margins on the low-equity book and would therefore end up making more money than previously, he said.
