Australian investors’ ears pricked up early March at news the big four banks were set to rise home loan rates. This is despite the fact the Reserve Bank had indicated it was going to keep the cash rate on hold.
Increases in global economic doubt and rising borrowing costs were cited as some of the contributing factors behind the decision. The need to alleviate the demand for loans as regulators consider whether additional controls are needed to protect Australia’s economy from being destabilised by record high housing prices in Sydney and Melbourne also played a part. This occurrence is what is known as an out-of-cycle home loan rates hike.
As the term suggests, an out-of-cycle rate hike occurs when lenders increase interest rates out of sync with the RBA’s target cash rate. Out-of-cycle interest rate hikes are unpopular for many reasons, chiefly because they place further mortgage stress on property investors and owner-occupiers that may already be struggling to meet repayments.
At present, the RBA’s rate stands at 1.5 per cent, – unchanged during the last 6 meetings. Contrary to this however is NAB, CBA, ANZ Bank and Westpac, who have taken matters into their own hands and increased interest rates across the board for both interest only and interest and principal loans. Let’s take a look at where each bank now stands.
As a worst-case scenario example, an investor with a variable principal and interest loan that’s risen 0.25% against $500,000 worth of debt can expect to spend an extra $1,250 per year or $104.16 per month on mortgage repayments.
Not exactly small change, especially since the RBA estimates that one-third of Australian borrowers have not built up a repayment buffer, or are less than one month ahead on their home loan repayments.
This leaves the average Australian homeowner or investor incredibly exposed to the very real threat of another rise in interest rates. Mozo spokeswoman Kirsty Lamont has commented on the situation by adding that borrowers “continued to be hit hard by out-of-cycle rate rises”.
Subsequent out-of-cycle rate hikes for both investors and owner-occupiers could also spark widespread economic downturn, due to the fact that a highly indebted household sector is likely to be more sensitive to declines in income and wealth, and may respond by drastically reducing consumption.
These hikes have also coincided with recent figures showing that only 11.6% of Australians see property as a viable investment – the lowest since The Melbourne Institute of Applied Economic and Social Research started the survey in 1974.
It seems that perhaps the property market pundits’ cries of “What comes up, must go down”, is conversely applicable in relation to lenders interest rates for the foreseeable future.