* To raise rates by 14 basis points, from Sept. 19
* Decision out of lockstep with the central bank
* Westpac shares close 2.7 pct higher at A$28.88 (Recasts lead, adds industry context, stock's closing level)
By Swati Pandey
SYDNEY, Aug 29 (Reuters) - Australia's Westpac Banking Corp WBC.AX became the nation's first major lender on Wednesday to raise its key mortgage rates in an effort to preserve its profit margins amid higher wholesale funding costs.
Westpac, Australia's No.2 lender, said its variable home loan rates would rise by 14 basis points from Sept. 19, sparking speculation other banks would follow suit. Investors cheered the move, sending Westpac's shares 2.7 percent higher.
The decision is out of lockstep with the country's central bank which has kept the official cash rate at a record low 1.50 percent since 2016 and signalled a steady path for some time.
The move knocked the Australian dollar AUD=D3 lower as traders wagered the Reserve Bank of Australia (RBA) might be forced to keep policy stimulatory for longer in the face of a de-facto tightening in the market. four out of every five loans in Australia priced in variable interest rates, the impact of Westpac's move will be felt by a large number of households.
"This is a tough decision," George Frazis, Westpac's head of consumer bank, said in a statement.
The Bank Bill Swap Rate, a key wholesale funding rate used to price mortgages and other products, jumped about 25 basis points between February and March and has since remained elevated, Frazis said.
The spike in the funding costs had prompted several analysts to predict mortgage rate hikes by banks earlier this year. But faced with public anger over a series of malpractices, the country's major banks had refrained from passing on the cost. "Big Four" - Westpac, ANZ ANZ.AX , National Australia Bank NAB.AX and Commonwealth Bank CBA.AX - together control about 80 percent of the country's deposit and home loan markets, and are some of the world's most profitable lenders.
"We initially hoped that this increase would be temporary, and therefore we have incurred these costs over the last six months," Frazis said.
"The rate changes announced today will not recover these costs."
Just last week, Westpac reported an eye-watering 11 basis point drop in its net interest margins, the difference between interest paid and earned, to 2.06 percent for the quarter ended June. bank's variable mortgage rate for owner-occupier properties will increase to 5.38 percent per annum for customers with principal and interest repayments, from Sept. 19
The rate for residential investment properties will go up to 5.93 percent, the bank said.
The 14 basis-point increase will add A$35 ($25.6) to the monthly interest cost of an average mortgage of A$300,000, Westpac said while noting about 68 percent of its home loan customers were ahead of their repayments.
The median price for a home in Sydney, Australia's biggest city, has topped A$1 million in the past couple of years, forcing new borrowers to take out much larger loans. and Melbourne comprise about 60 percent of Australia's housing market by value and 40 percent by number.
Westpac's shares jumped to the day's high of A$29.02 before closing at A$28.88, up 2.7 percent.
($1 = 1.3669 Australian dollars)