There was a recent rise in the business loan rates and hence as expected there will be a parallel rise in mortgage interest rates. According to market economists the increase in the interest rates will be felt as early as a month after the announcement of the increase in business loan rates.
The interest rates are set to increase some 0.08 and 0.29 percent for business loans and overdrafts in February and early March. This is already being implemented by the four biggest Australian banks and this heralds the trend of rate increase that will trickle down to small banks and small lending companies.
Business Loans Rate Increase
According to Mr. Koukoulas, a well known market econimist, banks are competitive and although they will normally stay away from starting a trend in the increase of interest rates in business loans they will definitely do it if it is how they will have to make a profit. Seeing that they have already started raising the interest on business loans they will surely do the same on mortgage rates.
This is not something new to us, it is not the first time that banks have raised mortgage rates out of cycle to the RBA, it surely would not be the last because the overheads on these banks are getting higher and so they need to find ways to increase their revenue to be able to cover their ballooning expenditures.
“The banks are borrowing short end lending for long-term mortgages. They are paying about 40 to 50 basis points extra, plus the cost of BASEL III and APRA [Australian Prudential and Regulation Authority] requirements to hold more AAA rated liquid assets . . . this is a global issue,” Mr Koukoulas added.
It is almost the same as what happened last year, the trend in the increase is predictable and it is most likely what will happen this year. According to market economists this year’s increase would most likely be a 0.10 to 0.15 of a percentage point rise and while it would be a damper to borrowing it would not cause a recession. A borrower with a $350,000 loan would have to add up to $25 a month towards their mortgages if rates go up 10 to 15 basis points. SQM Research managing director Louis Christopher said, however, if the banks raise rates again this time, it could have a negative impact on the economy which can result in devastating downturn. Why? Because the market is already overvalued right now. In Mr Christopher’s opinion the housing market will remain stable as long as business loan rates and mortgage rates do not move up drastically.