Borrowers should brace themselves for home loan rate hikes: ME

Thursday 20 July 2017

Article by Tom Watson

Challenger bank and home loan lender, ME has urged borrowers to ensure they’re prepared for a series of potential rate rises following the release of minutes from the RBA’s July 4th meeting.

Borrowers should brace themselves for home loan rate hikes: ME

Despite opting to keep the official cash rate steady at 1.50% for a ninth consecutive meeting, notes from the RBA meeting estimated the neutral real interest rate to be around 3.50% - or, as ME noted, eight typical rates hikes above the current level. 

The neutral interest rate is the rate at which inflation is stable - indicating a level in which the economy is on a sustainable path. The RBA can adjust the cash rate (currently 1.50%) to better reflect the neutral rate and ensure stability in the market.

Given the cash rate is currently 200 basis points (or eight typical hikes) below the estimated neutral rate, experts believe that the RBA may be signalling a rate rise in the near future to keep inflation levels in check.

“It’s been an extraordinary downhill run for interest rates since late 2011, taking the official cash rate to a historic low of 1.50% by January 2017, but things can easily go up as they can go down,” said Patrick Nolan, Head of Home Loans at ME.

So what would happen if the RBA was to raise the cash rate to parity with the estimated neutral rate? The Mozo rate change calculator shows that a borrower making monthly mortgage repayments at the average variable rate on a $500,000 loan (currently 4.37% according to the Mozo database) would see their repayments increase by $594 a month with a 2% rate increase.

Given that research released earlier this year suggested that one in five Australian owner occupiers could be placed under severe financial stress given just one or two rate hikes from the RBA, borrowers have been urged to secure their finances.

“Banks apply ‘stress tests’, typically around 2-3% above the advertised rate when assessing loan applications to ensure customers can comfortably repay in higher rate environments,” said Mr Nolan.

“But regardless, borrowers also need to take responsibility.”

Are you worried about the impact a potential rate rise could have own your own repayments? Refinancing your mortgage could be the best place to start. The Mozo home loan database compares over 500 loans, with many providers offering loans under the average 4.37%.

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