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How worried should we be about higher home loan rates?

How worried should we be about higher home loan rates?

Around $60 billion of interest-only loans are due to reset over the next four years. According to the Reserve Bank, that could create wider problems if the economy turns down.

One trend we’re keeping an eye on at Montgomery is the financial health of the average Australian household and any knock-on effects for the property market. That’s why some comments out of the RBA have perked our interest, in particular the $60 billion of interest-only loans which are due to reset over the next four years.

The question comes down to whether those mortgage holders can pay the higher payments once their interest only period rolls over. The RBA has noted that whilst some will move into principal and interest payments as per the contract or move into another interest-only loan, others may not meet the current lending standards required to extend their interest-only timeframe.

The RBA has also noted that one-third of borrowers (out of all households) have no mortgage buffer – meaning that if interest rates were to rise by a small margin or said borrowers were to become unemployed, it will be difficult for them to meet their repayments.

In a strong economy, these issues can usually be managed – financial institutions are typically profitable and strong enough to weather some losses and the risk of those borrowers losing jobs is reduced. Even if they do become unemployed, other jobs can be found quite quickly.

The issue becomes more pertinent in a weak economy. As it stands, the likelihood of a recession appears low in the short term. Yet Australia’s economic prospects are notably more tied to global factors than local factors and so we’d focus our attention there.

On that count… growth in the US appears strong, Europe appears to have put many of its sovereign issues behind it (yes there are still political issues, but these pale in comparison to the issues that Italy’s financial system faced only a year or two ago) and even if you were to say that there is building risk in China (which there is) the markets don’t appear to be too focused on it.

For now, the global outlook appears sound, yet this could change quite quickly and, since Australia is part of the global economy, this is when issues may arise.

Around $60 billion of interest-only loans are due to reset over the next four years. According to the Reserve Bank, that could create wider problems if the economy turns down. Click To Tweet

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. “Europe appears to have put many of its sovereign issues behind it”…….Northern Europeans like earning negative interest rates then? People would rather own Spanish and Italian bonds rather than US treasurys? Or is it that the ECB is completely manipulating the price of their sovereign bonds? No negative effects from QE then. Great ! Free lunches for all !!

  2. Thank you for sharing article, yeah troublesome senario, housing sector doesn’t seem to be slowing down in Melbourne, employment is strong but wage growth is weak, somehow loans are still getting approved in Melbourne and Geelong. Interest only loans ending up costing more in long run. Interesting times ahead. Watch out for “Black Swan” according to Naseen Taleb.

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