Mortgage Interest Rates to Rise

[Guest The Pom Queen]

Last week, all of the big four banks and many of their smaller competitors raised interest rates. In step with each other, but out of step with the Reserve Bank.

So, while the official cash rate is still sitting at the historically low level of 1.5 per cent, loan repayments are getting bigger.

"The commercial banks, even though the cash rate hasn't moved, are repricing their loan products because their funding costs are now higher," said Stephen Walters, chief economist at the Australian Institute of Company Directors.

He links it to one major event.

"Just before the presidential election, bond yields in the US were below 2 per cent. This is 10-year bond yields. Now [they're] up around 2.5 per cent.

"So, that's about 80 basis points higher than they were four or five months ago."

But Omkar Joshi, banking analyst with Regal Funds Management, doesn't buy the banks' excuse the rate rises are due to increased wholesale lending costs.

Instead, he thinks banks have found a politically astute way to boost their profits.

What happens if everything that can go wrong for Australia's economy does so all at once in 2017? asks Michael Janda.

"The reality is it's been really hard to raise rates, especially out of cycle with the RBA." he said. "The politicians are always on the back of the banks, basically, and every time they lift rates [politicians are] very quick to jump on the banks.

"The banks have worked out that investor loans — you can actually reprice them up, rather than owner-occupier [loans], [and] nobody really says anything."

After 2012 there was a substantial increase in the growth of new home loans — so much so that the regulators moved in at the end of 2014 to cool the market. And it worked, for a time.

More pain to come

But it's back rising at a strong clip — driven almost entirely by investors.

And the Reserve Bank in particular has been very vocal — at least by their own standards — on how the extraordinary growth in house prices in Australia's two largest cities is a risk to the financial stability of the economy.

Why do US rates matter?

It's no surprise the Fed raised US rates, but Phillip Lasker warns the flow-on effect may catch out Australian borrowers.

They have already flagged they would be willing to step in unless the growth was brought under control.

"I think the banks are certainly having conversations with the regulators about, perhaps, targeting these rate hikes to areas where the risks are getting a bit beyond what the regulators are comfortable with — particularly the non-owner-occupier investor segment of the market," Mr Walters said.

Investors are being hit hardest, but so are owner-occupiers with interest-only loans, who are more likely to feel the pinch from rising interest rates.

"If you're only paying off the interest and not paying off your principal, it does suggest perhaps you've got a loan that may be stretching your affordability a little bit," he said.

Of particular concern is those people who took out interest-only loans when standards were more lax.

"In the past few years, APRA [the prudential regulator] and ASIC [the corporate watchdog] have asked the banks to tighten up their lending standards, which they've done," Mr Joshi said.

"The problem is, you've got people who took interest-only loans, say four or five years ago, that will roll in the next few years — ... switch into principle and interest payments and potentially they can't afford those repayments."

Mr Walters expects there is more pain to come.

"I think people need to brace themselves. Even though the Reserve Bank won't be doing anything on interest rates in term of rate hikes, there's probably more increases in mortgage rates coming through."

The Reserve Bank will be hoping those increases cool the property market and not just boost bank profits.

[Mike@Bonbeach]

I bet their Term Deposit rates or any interest paying accounts don't go up,