Interest Rate

Interest Rates May Hit 10%

To avoid inflation, the Reserve Bank of Australia will most likely increase mortgage rates to ten percent over the next two years. The top economists site rising employment and increasing commercial prices have prompted the RBA to make such a move.

Because of which, economists of Commsec, the investment arm of the Commonwealth Bank, and Macquarie Bank have also predicted that the official cash rate will go up to 7.25 percent by 2012 if the country’s economy continues its strong growth.

Due to the expansion of profit margins by banks during the global financial crisis, it is possible that variable mortgage rates will increase by 10.1 percent. This would be the highest variable mortgage rate since 1996.

Citibank chief economist Josh Williamson stated that since bank rates are 2.90 percent higher than the official cash rate, mortgage rates can reach double figures if the cash rate is increased even if it is not as high as the last increase.

Macquarie Bank’s interest rate strategist Rory Robertson also said that if the economy continues its rise, a soaring labour market will force the Reserve Bank to increase its rates. Robertson also added that the RBA is just trying to prevent a same scenario like the Lehman Brothers downfall in 2008.

Also, Commsec senior economist Savanth Sebastian proclaimed that cash rates can go back to its pre-crisis numbers if the prices of coal and iron ore will steadily rise. He also added that the imminent rate hikes is a repeat of the boom of commercial commodities in 2003 and 2008 although this latest rate hike might exceed the numbers that were tallied during those years.

However, this development might bring fear to many households especially those who brought out everything that they can to buy properties in record-low numbers last year. Once the ten-percent mortgage rate is effective, a borrower with a $300,000 mortgage and a 5.75 percent mortgage rate will have his monthly repayments rise from $1887 to $2726. Even a 9.5 percent mortgage rate will prompt a $734 increase in mortgage.

Due to the possible increase, mortgage brokers have urged buyers to add two percentage points as rate adjustment to their mortgage calculations before they decide to borrow. This way, they won’t be caught off guard when the mortgage rate hike becomes effective.

If the mortgage rate hits 10 per cent, Fujitsu Australia has created a mortgage stress index which shows that about 1.1 million households might incur repayment problems. However, the index also showed that house prices will stay put due to steady employment and continuing property shortage.

Because of these figures, Fujitsu Australia director Martin North predicted that prices will only fall for a small figure but they won’t crash drastically. However, there is a possibility that the first home buyers that were helped by the government incentives might sell their properties which can lead to a weakening property market.

When this happens, AMP chief economist Shane Oliver said that the high mortgage rates will increase the number of delinquent borrowers although property prices might decrease by ten percent.