Mortgage Rates - "Is it time to get off the fence"


Mortgage rates are heading up

In a technical research piece on where Australia's neutral interest rate lies, Credit Suisse economist Damien Boey suggests interest rates have been a lot tighter than people realise and it is time to revisit the current setting.

As Mr Boey says - , interbank credit spreads are a powerful leading indicator of where mortgage rates are heading. Interbank spreads are getting wider, so mortgages rates will go up.

So the RBA's settings are currently getting tighter, even when it does nothing. .

"Although the RBA is keeping the cash rate steady for now, the market is doing a lot of tightening for the bank," Mr Boey said.

"Currently, wide interbank spreads are consistent with a widening of the mortgage spread of at least 30 basis points over the next few quarters."

So if the RBA does not cut rates — and that is unlikely given its determination to raise them — out of cycle rate hikes from the major banks are on their way, and conditions will get much tougher for the bulk of borrowers holding variable rate loans.

Will housing be affected?

The short answer is yes.

If rate cuts and stimulus drove prices higher, it's not too much of a stretch to imagine the impact on asset markets once official and market rates head north.

Capital city real estate already has begun to stagnate after six years of frenetic gains.

Sydney prices have fallen 2.1 per cent in the past year, Melbourne marked time over the past quarter with Hobart the only major centre still roaring ahead.That's largely due to the handbrake being applied by regulators such as APRA and the Reserve Bank over high-risk lending.

A rate hike would put enormous pressure on those who have borrowed to buy real estate at or near the top of the market.Not only would their ability to maintain repayments be affected, higher rates would accelerate price declines which may see many with mortgages that outstrip their property value.

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