Get ready For Eight Rate Hikes

Home loan lender ME Bank is “urging” borrowers to brace themselves for eight rate hikes in the near future, following the release of minutes from this month’s RBA meeting.

In the minutes of the Reserve Bank of Australia’s last meeting on July 4th, the RBA’s estimation of the ‘neutral real interest rate’ is 3.5 per cent.

Therefore, the rate at which output growth is at potential and inflation is stable is 2% higher than the current level of 1.50 per cent.

Monetary policy has been expansionary for the previous five years or so, and the cash rate has been at its record low level of 1.50% for almost a year.

ME Bank has warned that this could soon lead to the Reserve Bank hiking the cash rate.

It argued that an increase to 3.5 per cent would boost average mortgage rate from 5.3 per cent to more than 7 per cent, adding $520 per month to a loan average of $400,000.

When banks assess a loan application they use an assessment rate of 7.25% – 7.5% so that there is the ability to pay the loan repayments when rates rise so there is a buffer but the default rate has been very high and has only recently stabilised.

Mortgage rates could rise much further and fast. Banks have already started increasing rates because of pressure from regulators especially for investor loans and Interest Only loans. APRA has required increased capital holdings from all deposittaking institutions to establish a banking system that can readily withstand periods of adversity.

Obviously if the banks are required to hold more money, it increases their cost of funds and so they could compensate by increasing rates, fees and charges to all borrowers including businesses.

I would say if you haven’t refinanced recently then now would be a good time to lock in a fixed rate for the next 2-3 years. Who know how high it will go or how fast.

Give Every Loan a call on 96532034 to discuss what you can do with your rates, or for any other finance need.

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