Australian investorsâ ears pricked up early March at news the big four banks were set to rise home loanÂ 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 Australiaâs 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 RBAâs 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 RBAâs rate stands at 1.5 per cent, â 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. Letâs take a look at where each bank now stands.
As a worst-case scenario example, an investor with a variable principal and interest loan thatâs 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 âcontinued to be hit hard by out-of-cycle rate risesâ.
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 â the lowest since The Melbourne Institute of Applied Economic and Social Research started the survey in 1974.
It seems that perhaps the property market punditsâ cries of âWhat comes up, must go downâ, is conversely applicable in relation to lenders interest rates for the foreseeable future.
The ACCC has come down hard on the big banks. More information is below but