More home loan rate rises are on the way

Banks face higher costs and capital pressures

Rates may have stayed on hold for six straight months (five consecutive Reserve Bank board meetings) but it hasn’t stopped banks from lifting home loan rates. Research by RateCity. com.au found that a total of 382 home loan rates, including 265 fixed and 117 variable products, have been hiked between January 1 and February 6.

“This is just the start for higher rates and we expect this trend to continue as banks face higher lending costs both from nervous international funding sources and increased pressure from our local regulator to hold more capital,” says Peter Arnold, data insights director at RateCity.

Money’s Ross Greenwood says banks are now moving rates to a different beat because they’re watching longterm government bond yields rise (that’s the market rate on 10-year bonds) and the money market short-term rates have also increased. (See his column on page 78 for more on bond yields and rates.)

“The banks are also seeking to limit their exposure to riskier areas of the property markets, so they are either rationing out capital or making it harder for some investors to get finance,” adds Greenwood.

Although most people think that the next rate move will be down, there is some speculation that if Australia’s economy looks stronger by the end of the year, there will be pressure on the Reserve Bank to raise interest rates, says Greenwood.

Home owners and investors should be prepared for that possibility. RateCity’s Arnold warns that data shows that the proportion of people falling behind on their mortgage repayments reached the highest point in three years last year, and as rates increase further it could really hurt a lot of Australian home owners.

“Variable borrowers should get set for higher expenses this year or be prepared to switch,” he says. “Either way, we’d urge home owners to keep an eye on their rate and the market so they have increased negotiating power for when that time comes.”