Conditions in mortgage rates have been in a glorious honeymoon period for nearly 5 years.  If you have a mortgage, you have been the key beneficiary of these low rates. You’ve enjoyed more money for discretionary spending, have been able to make larger repayments, and have been able to take on a larger mortgage. Is the honeymoon over, We are certain it is and that mortgage rates will rise before any RBA increase.

Rates will stay low forever – NOT

Are you guilty of becoming too comfortable with where rates are now, are you starting to believe rates will stay low forever? You’re not alone.

We believe that recent shifts in financial costs (the cost banks pay for money) could be the catalyst for banks to start raising rates before the RBA. Here’s why.

1. Bank bill swap rates have increased, a repercussion of rising overseas funding costs.2. The short term US bond rates have risen nearly 50% over the last 12 months.3. The US Federal Reserve have tipped 3 more rate rises this year.4. US mortgage rates have been rising from mid-May onwards.

Overseas rates are already rising

We expect that as overseas banks funding costs rise (specifically the 10 Year US Treasury Bond) we will see a flow-on effect on our Australian banks. The result? These funding cost rises will soon be onforwarded to Australians mortgages in the way of interest rate increases.

You may ask why haven’t the banks raising rates already? Well, they have. The rises that have occurred have been so slight the media didn’t bother to report them, so you didn’t hear about them.

Are rising mortgage a threat to US Housing?

Banks are not raising yet, to protect from more public scrutiny

Factor in the reputational damage suffered by Financial Instructions  in the wake of the Royal Commission, and you can see why they may be somewhat reluctant to risk provoking any attention through a meaningful rise. But at some point, the banks will look to increase their costs. After all, they have to sustain shareholder returns.

We are certain that most Australians mortgage holders are somewhat unprepared for the financial impacts of even minor rate rises before the RBA kicks in their first rate rise.

Overall Australians have magnified their levels of household debt post the global financial crisis, having seen levels rise to nearly 200% of debt to disposable income, exceeding that of the United States, Japan and the UK. This means that if you bring home $1,500 per week and you have $400,000 of debt – if we see a rise of 1%, you will have $238 of additional debt repayments per months. And that’s only a 1% rise.

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