The Reserve Bank of Australia board has cut the official interest rate by 25 basis points to 4.25 per cent, giving mortgage holders and borrowers a pre-Christmas reprieve.

The RBA announced the rate cut at 2.30pm AEDT today following the board’s final meeting for the year.

It’s the second interest rate cut in as many months after the RBA lowered the cash rate on Melbourne Cup day in November.

In a statement issued with the announcement, RBA Governor Glenn Stevens said there had been "considerable turbulence" in financial markets and said financing conditions had become more difficult.

"This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased," Mr Stevens said in a statement accompanying the decision on Tuesday.

Economics analyst Ross Greenwood said Europe’s debt crisis would have been a significant factor in the RBA’s decision.

"The Reserve Bank indicated that it is still concerned about the European economic situation and the prospects of a global slowdown hurting Australia and its export markets," Greenwood told ninemsn.

While it’s good news for mortgage holders and borrowers, Greenwood cautioned consumers not to expect the banks to pass on the full interest rate.

Analysts were divided about whether the RBA would cut the rate today, with a survey of 14 economists conducted by AAP revealing seven tipping a cut, and seven predicting rates would stay on hold for another month.

Story source: www.ninemsn.com.au

A FRESH round is likely to begin in the mortgage price war with Commonwealth Bank pledging to beat any advertised rate among its three big rivals.

The pledge has hallmarks of the ”unbeatable” campaign launched by National Australia Bank in New Zealand, a move that spurred on home lending but crunched margins among banks.

The move has been timed with the spring sale season, traditionally the most active period in the Australian housing market.

Intense competition has already emerged among banks across fixed rate loans, with some starting to price fixed rates lower than variable rates.

But CBA’s push extends to both fixed and variable rates and will remain in place until the end of September. The move is expected to draw a swift response from rivals National Australia Bank, ANZ and Westpac.

CBA’s executive general manager of retail products, Michael Cant, said the move was aimed at providing borrowers with competitive home loan deals.

”Our guarantee to beat our major competitors means we’re putting our money where our mouth is,” Mr Cant said.

Sluggish global economic growth, worsening debt market problems, as well as doubts about the Australian outlook have sparked predictions of cuts to official cash rates.

Source: www.domain.com.au

The Reserve Bank of Australia (RBA) has spared borrowers an interest rate rise, leaving the cash rate at 4.75 percent in a widely expected move.

The Reserve Bank last increased the overnight cash rate in November 2010 to 4.75 percent from 4.5 percent and most economists still expect a rate rise this year.

“We expect that the Reserve Bank’s decision to leave the official cash rate unchanged at 4.75% today will fuel a new trend emerging where we’re starting to see Australians saving less and borrowing more money for home loans," RateCity chief executive Damian Smith said.

Prior to the announcement the Australian Chamber of Commerce and Industry warned that an official interest rate rise today would "punch a hole" in business and consumer confidence. The chamber’s latest expectations survey, released on Monday, again highlighted the pressures businesses are facing, it said.

"We are particularly concerned about a pre-emptive rate increase, or an early increase," the chamber’s director of economics and industry policy Greg Evans told reporters in Canberra.

"That that could be very damaging and punch a hole in both business and consumer confidence."

The head of the Bank of Queensland has warned that Queensland’s economy is at its weakest level in the past five years due to falling tourism and deflated real estate values, and that any additional interest rate hike would only serve to cause more damage, according to a report by The Australian.

David Liddy added that the strength of the mining and manufacturing sectors is overshadowing significant weak points elsewhere in the economy, and joined business leaders in expressing concern over the possibility of an interest rate hike by the Reserve Bank of Australia in its determination to cap inflation.

The concern expressed by Mr Liddy and business leaders at Monday’s Australian Agenda event came on the heels of the release of minutes from the RBA’s May board meeting, where board members suggested that higher interest rates may be necessary to fight inflation.

Speculation suggested a rate hike could come as early as the RBA’s next board meeting, which occurs in two weeks, according to The Australian.

Since the Australian market is almost regulated by its mortgage system hence the government wants more foreign banks to enter and grow their local operations in the country.

The reports reveal that international banks have a very little share in the stock market of Australia that is already dominated by its four big local banks. And these banks control near about 90 per cent of the mortgage market of the continent. Recent updates show that two of these four big banks have increased lending rates more than the central bank of the country last week to prompt Canberra promise reforms for making mortgage market more competitive.

Besides concentrating on the smaller lenders, the government now wants to strengthen more foreign banks to nurture in Australia with Citigroup Inc. (C), ING Groep NV (ING), as well as a few large international banks which wish to prosper their mortgage businesses throughout Australia.

Talking to media personals, Australia’s Treasurer Wayne Swan revealed that they welcome all major and minor foreign investments who had a desire to work in the Australian market.

In an attempt to suppress public outcry against the country’s big banks to prompt government reaction, both Australia New Zealand Banking Group Ltd. (ANZ.AU) and Commonwealth Bank of Australia (CBA.AU) have raised their mortgage rates by 45 to 39 percentage points to hit borrowers after the Reserve Bank of Australia rose its cash rate 25 percentage points to 4.75% previous week. Around 90% of home loans are on variable rates in Australia.

As far as consumers are concerned who are already under pressure of inflation, this adds around A$100 that is US$100 to the average A$300,000 for Commonwealth Bank as well as A$85 mortgage for ANZ every month. National Australia Bank Ltd. (NAB) and Westpac Banking Corp. (WBK) have yet to declare their new lending rates in the wake of hike registered in RBA.

Given the dominance of large local lenders in major cities and the prohibitive fees charged for shifting a mortgage to a new lender, international lenders have been struggling to get a foothold in this thriving economy with both a real-estate and mining boom.

Story by Rajarshi Dutta www.forexdice.com

View the original article here

Public pressure could be behind a decision by three of Australia’s big banks to delay rate rises in line with the Reserve Bank of Australia (RBA) official 0.25 percent hike.

“It’s certainly a little unusual that three of the major four banks haven’t announced their interest rate movements by this stage, but it’s not unheard of. Clearly, the political and customer reaction to the Commonwealth Bank’s decision to lift variable rates by 0.45 percent has given them something to think about,” RateCity chief executive Damian Smith said.

He said that the other banks would most likely follow eventually.

“Borrowers should assume that most institutions will lift rates by at least 0.25 percent; we’d be surprised if many followed the Commonwealth’s lead and went as far as 0.45 percent.”

However, Mitchell Watson, an analyst from finance research firm Canstar Cannex said that banks usually make announcement within hours of each other.

“We tend to hear within the first 48 hours what banks will be doing about interest rates,” he told the Sydney Morning Herald.

“Obviously there has been a bit of a stalemate since last Tuesday.”

And it seems that the backlash will continue after the CBA chief executive Sir Ralph Norris told News Limited that the bank’s interest rate hike could mean that some customers could lose their homes.

“Making this decision didn’t come easy. I Have done all I can to try and minimize the impact by making sure we’ve got some good customer assistance programs for those customers that are genuinely in need. That’s all I can do,” he said.

ING Direct is looking to take advantage of the backlash against the big banks by offering $1,000 to customers who switch their mortgage to the small lender.

The foreign-owned bank says anyone who brings their mortgage across to ING Direct and opens an Orange Everyday transaction account before June next year will receive $1,000.

Customers need to register for the offer by the end of November.

“Switching banks should be easier and this $1,000 is an incentive for people to start the process,” ING Direct chief executive Don Koch said in a statement on Tuesday.

“If customers become more mobile, banks will be forced to offer better value and better service.”

ING Direct’s variable home loan interest rates vary from 6.71 per cent to 7.34 per cent, depending on the particular product.

National Australia Bank offers the lowest mortgage rates of the big four banks at 7.24 per cent, followed by ANZ (7.41 per cent), Westpac (7.51 per cent) and Commonwealth Bank (7.81 per cent).

ING Direct began operating in Australia in 1999, and with no branches deals with its customers over the phone or online.

It has more than 1.4 million customers, with $37 billion in mortgages and $22 billion in deposits on its books, it says.

RateCity is part-owned by ninemsn

Story By Alice Uribe, ninemsn Money with AAP: www.ninemsn.com.au

View the original article here

CUP Day punters could have an extra reason to cheer today, with the odds strongly in favour of the Reserve Bank keeping interest rates on hold for a sixth consecutive month.

But any sigh of relief from borrowers could be short-lived, with some pundits predicting that the RBA will still send rates north by Christmas. And analysts are divided over whether Australia’s big banks will be forced to raise rates independently if the RBA chooses to keep its powder dry today.

Nomura’s Victor German said it was clear banks wanted to raise rates, but, from a political point of view, it would now be "very difficult".

He named Commonwealth as the bank most likely to go it alone, but said the chance of an independent rise was "diminishing" with the new Senate inquiry into banking competition.

Southern Cross Equities analyst TS Lim agreed that political pressure made it tougher for banks to raise rates but said increasing funding pressures meant banks were likely to act anyway.

"Once CBA does it the rest will follow," he said.

Futures market betting on the likelihood of an official rise has plummeted in the past week after benign inflation data dampened expectations that the RBA would lift the cash rate to 4.75 per cent.

Market odds last night reflected just 26 per cent chance of a rate hike today, despite new data revealing an uptick in price pressure in October.

Commonwealth Bank chief economist Michael Blythe said a rates pause today would be "probably only a temporary reprieve".

He said economic data in the next month – including critical growth, job and capital spending indicators – could convince the RBA to hike in December.

The TD Securities-Melbourne Institute monthly inflation gauge showed that on an underlying or "trimmed mean" basis – a measure used by the RBA – inflation rose by 0.2 per cent after flat results in August and September.

On a yearly basis, inflation grew at 3.1 per cent – outside the RBA’s target range of 2 to 3 per cent.

Pushing the gauge higher were price rises for car fuel, fruit and vegetables, and insurance services.

Story by Rachel Hewitt – with Peter Taylor www.heraldsun.com.au

The central bank says it’s aware of the difficulties property developers face obtaining credit, but it has questioned whether the sector is overly-reliant on debt.

Reserve Bank of Australia (RBA) Deputy Governor Ric Battellino expects an improvement in the economy over the next few years to be reflected in the commercial property market.

In a speech to the Property Council of Australia in Brisbane on Friday, Dr Battellino said it was difficult not to conclude that the financing of the property sector became "over-extended" during the boom years, and that a period of adjustment was "largely unavoidable".

"In saying this, I don’t want to downplay the difficulties that some firms are now experiencing as that adjustment takes place, or the impact it is having on property development," Dr Battellino said.

"But cycles like the one we are going through seem to be endemic to the property sector and raise the question of whether, over the longer term, the financing model of the sector should shift towards more equity and less debt."

However, he said the "adjustment process" had been under way for some time and substantial progress had been made.

He said a period of increasing arrears on property loans may be coming to an end, after equity raisings had made an important contribution to reduced gearing levels.

As well, the expected improvement in the economy over the next couple of years would be "reflected in the commercial property market", he said.

"There are already some signs of this," Dr Battellino said.

"That in turn should boost lender’s willingness to make loans to the sector, though I don’t think it would be in anybody’s interest to return to the free-flowing credit of a few years ago."

He said the property sector was vulnerable to changes in the availability of credit because it operates with a relatively high level of gearing and low holdings of cash.

Dr Battellino added that he was satisfied with the current moderate growth in household credit after an annual increase of seven per cent.

The moderate pickup was mostly due to housing loans, while other forms of household debt, such as credit card debt, margin loans and personal loans had been "relatively flat".

"All this is consistent with households taking a more cautious approach to their finances," he said.

"For households, therefore, the current picture is one where borrowing for housing is broadly growing in line with income, house prices are stable and there is little appetite for other forms of debt," he said.

"From the Reserve Bank’s perspective, this seems to be a satisfactory state of affairs."

He also said that small businesses currently had better access to credit than the large business sector.

Over the next few years, the RBA expects economic growth to pick up from its current rate of 3.75 per cent to closer to 4 per cent.

It was then likely that underlying inflation would pick up from the current 2.75 per cent to be around three per cent by the first half of 2012, Dr Battellino said.

"In the Australian economy, growth is around trend and underlying inflation is in the target range," Dr Battellino said.

He added that keeping growth around trend and inflation within the target range would be challenging given the economy was approaching full capacity and the resource boom was re-emerging.

"As noted in the statement issued after the board meeting earlier this week, if economic conditions evolve as currently expected, it will be likely that higher interest rates will be required at some point," he said.

Dr Battellino said that global economic growth, and Asian growth, was returning to around trend.

Story by Kim Christian Ipswich Advertiser

The Reserve Bank surprised many when it decided to leave the cash rate unchanged at 4.5 per cent this month, despite the market pricing in a greater than 70 per cent chance of a rise.

It has now been five consecutive months since the last rate rise in May, which is good news for the property market.

Sydney property activity for spring has been solid with September recording a healthy 66 per cent clearance rate with total sale values up on this time last year driven by a surge in listings.

Almost 2300 properties are listed for auction this month, compared with 1625 for the same period last year.

It seems vendors are taking advantage of the traditionally strong spring selling season combined with the impetus to act now before the next phase of interest rate rises begins and dampens buyer enthusiasm.

It’s no longer clear whether the next move upwards will be in November or if the Reserve Bank is likely to wait until the new year to start raising rates again.

According to the RBA, the average standard variable mortgage rate offered by the banks in September was 7.4 per cent.

Regardless of when interest rates start to move again, most economic forecasters are expecting at least another 1 per cent by the end of next year.

Take into  account comments from the banks about their struggle with increased funding costs, and it would be prudent to expect an additional increase on top of official cash rate movements.

So by the end of 2011, it’s possible that standard variable mortgage rates will be at 8.5 per cent or higher.

So what can mortgage holders do to gain some protection?

Many will already be thinking about potentially fixing part, if not all, of their mortgage.

Up until the last month, there was some uncertainty over the path of official interest rates due to some weak economic data at home and abroad.

This affected future views of interest rates in the market, and these in turn influenced how banks set their
fixed mortgage rates. According to RBA data, fixed-rate mortgages have been at similar levels as the standard variable rate since July, the first time since early 2009.

The latest housing finance figures (August) show the proportion of owner-occupiers taking out fixed rate home loans was less than 4 per cent, and actually fell slightly from July.

That is, more than 96 per cent of new loans in August were variable.

There is always a risk in fixing a mortgage and picking the right time to do so. The last time the proportion of new loans being fixed rose significantly occurred in March 2008, when the standard variable mortgage rate was
9.35 per cent, just shy of the peak four months later.

At this time, 24 per cent of all new loans were fixed, according to the ABS.

Now may be the right time to at least consider the option of fixing a portion of your mortgage.

With further rises on the cards, the opportunity exists to lock in a three-year rate now which may well be below the standard variable rate in a few months.

Anthony Ishac is the general manager for the Fairfax Media-owned Australian Property Monitors.

  The CEO of Australia’s largest independently-owned mortgage broker, Mortgage Choice, says the latest ABS housing finance data* highlights that warnings of interest rate rises are having a dampening effect on home loan demand.

The August ABS Housing Finance report 5609.0 shows a reduction in both the number and value of housing finance for investment housing, while the value remained steady for owner occupied housing finance. The total value of dwelling commitments dropped 1.3% from July to August 2010.

The number of owner occupied loans increased 1.0% and the number of loans for the purchase of established dwellings increased 1.4%. However, the number of loans for the purchase of new dwellings dropped 2.0% and the number of loans for the construction of dwellings dropped 1.0%.

Mortgage Choice CEO Michael Russell said, “It is no secret that winter delivered a slowed pace for housing finance demand, particularly from investors.”

“There is no doubt the Reserve Bank’s hold on the cash rate will shortly come to an end. What is just as worrying for potential and existing borrowers is how lenders will react to the news.

“To counteract any out of cycle rate movements, potential borrowers need to factor in higher loan repayments, create a savings buffer as early as possible and research their loan options thoroughly. It is important to know all the ins and outs before entering the mortgage maze.

“Some good news is that we have witnessed a dozen or so lenders announce product changes over the past couple of months. In a further sign that lender competition for home loans is rapidly returning, some lenders are offering special discounted interest rates and higher loan to value ratios.

“With a close eye on interest rates, potential and existing borrowers need to knuckle down now to prepare for rises by assessing their household budget, repayment strategy and the suitability of any home loan.

“A professional mortgage broker will introduce a borrower to a range of options, work to secure interest rate or fee discounts and put forward a solid case for loan approval. These are major reasons why 40% of all new home loans in Australia are sourced through brokers.

“Looking forward to the spring housing finance data, we will be keen to see if demand heats up.”

*All figures quoted are seasonally adjusted.

Source: www.australianhousehunters.com.au

Interest rates remaining unchanged for a fifth month.

The central bank left its key cash rate at 4.5 per cent, defying widespread expectations that it would increase it to 4.75 per cent.

"It’s a bit of a surprise," said Macquarie senior economist Brian Redican. "The press release (accompanying the RBA decision) looked consistent with an interest rate increase".

"The present uncertainty in the financial markets is keeping the RBA on the sidelines," Mr Redican said, adding ”that higher interest rates will be required."

Holders of a typical $300,000 mortgage are already paying $300 a month more than they were a year ago, when the RBA began the first of six rate rises to return borrowing costs to their long-term levels as the economy bounced back.

The reprieve for borrowers may be short-lived, though, with the big commercial banks flagging their intention to pass on rising funding costs in the form of higher interest rates.

There was speculation such an increase may come as early as today, but National Australia Bank, Westpac and ANZ said no change to their mortgage rates is imminent.
"We have not made any announcements regarding any changes to our standard variable interest rate at this time," said a spokesperson for NAB.

Westpac also ruled out a rate rise until after next month’s Reserve Bank meeting scheduled for November 2.

”Our standard variable rate remains unchanged in line with today’s RBA decision,” said a spokesperson for Westpac.
”We have no current plans to change our standard variable rate ahead of next months’ RBA meeting.”

The Commonwealth Bank said its rates are under review and declined to comment on its likely decision.

Rates outlook

And the prospect of an official rate rise still looms after the RBA hinted strongly last month it will use rate rises to combat inflation pressures from the booming commodity export sector – a suggestion repeated today by RBA governor Glenn Stevens.

”The current stance of monetary policy is delivering interest rates to borrowers close to their average of the past decade. The Board regards this as appropriate for the time being,” Mr Stevens said, in a statement accompanying the RBA decision.

”If economic conditions evolve as the Board currently expects, it is likely that higher interest rates will be required, at some point, to ensure that inflation remains consistent with the medium-term target,” Mr Steven said.

Inflation figures for the September quarter are due on October 27, just days before the central bank’s next interest rate meeting on Melbourne Cup Day.

Financial markets were pricing in an increase of 41 basis points in 12 months’ time – implying at least one more rate rise by the RBA by then – down from 53 basis points prior to today’s RBA decision.

Stocks pared their day’s losses after the announcement, ending about 0.4 per cent lower for the day after being off more than 1.4 per cent earlier.

RBA view

The RBA signalled that continuing doubts about the health of the international economy contributed significantly to its decision to stay put on interest rates this month.

”Financial markets are still characterised by a degree of uncertainty, and are responding both to differences in growth outlooks between regions and evident strains on public finances and banking systems in several smaller countries in Europe,” Mr Stevens said in his statement.

Greece, Spain and Ireland are among European economies struggling to cope with soaring budget deficits and slowing growth.

By contrast, Australia’s economy is showing ”growth around trend over the past year,” with prices for the country’s commodity exports ”very high,” the RBA governor said.

Indeed, Australia’s key economic measures are mostly improving, with the government’s fiscal stimulus spending easing back just as private spending perks up to take up the slack.

Importantly, the quickening growth is yet to stoke a pick-up in inflation, with prices growth moderating from ”the excessive pace of 2008,” the statement said. ”The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2.75 per cent over the past year. That looks likely to continue in the near term,” he said.

The Reserve Bank aims to keep inflation between a band of between 2 and 3 per cent over the medium term.

Patchy economy

One reason why inflation has been held back so far is that the growth of the overall economy – excluding the booming mining sector – remains patchy.

Data out today on the services industry showed the sector has contracted for the past five months, while retail sales rose 0.3 per cent in August – less than the 0.4 per cent pace expected.

Housing has also been under a cloud with price growth flattening out in major cities while new building approvals have fallen for six of the last eight months.

Other areas of weakness include slow lending growth, implying that banks are holding back on loans to businesses.

Mr Scutt noted that the RBA focused also on subdued credit growth.
"This has been getting little or no coverage in recent times but this will be closely watched in the months ahead…Credit has been weak despite the strong domestic labour market," said Arab Bank Australia trader dealer David Scutt.

"With households unwilling or unable to borrow more at present, it offers a strong indication that household finances are struggling with rates at present levels."

Other economists pointed to the brevity of Mr Stevens’ comments.

”What’s notable is that it is quite a short statement,” said RBC Capital Markets senior economist Su-Lin Ong.  ”There’s virtually nothing about housing or consumption” on the statement, she said.

"It does suggest maybe the RBA is paying a little more attention to what’s happening in Europe and some of the strains in the banking system there," she said.

Even so, "a rate hike before the end of the year is more likely than not," she said.

czappone@fairfax.com.au  BusinessDay

Federal Treasurer Wayne Swan says banks could not justify raising rates above the official cash rate if the Reserve Bank of Australia increases its rates when it meets on Tuesday.

On September 21, the RBA kept its benchmark cash rate on hold at 4.5 per cent since the most recent increase in May.

The last rise capped off a series of six that began in October last year when cash was at a multi-decade low of 3.0 per cent.

But economists are predicting a rise when the bank meets at 1430 AEDT on Tuesday.

Mr Swan said there were issues on the long-term funding profile of banks but it still didn’t justify hitting customers with higher interest rates than those of the RBA.

"I don’t think there is any justification whatsoever for any bank to move above the official cash rate decision of the Reserve Bank," Mr Swan told ABC Radio.

"Banks are making healthy profits at the moment, their net interest margins are back above what they were before the global financial crisis."

HSBC’s chief economist Paul Bloxham expects the RBA 25 basis points this year, putting the brakes on an economy fuelled by China’s insatiable demand for resources.

Mr Bloxham says that if the central bank does not raise official interest rates at its meeting on Tuesday, it is likely to do so before the end of the year.

Story from ninemsn.com.au

Many Australian homeowners can’t be bothered switching lenders even to save more than a thousand dollars, according to mortgage broker Loan Market.

A national survey by Loan Market found 58 per cent of respondents said they would need to save at least $1500 a year to be motivated to refinance with another lender.

Loan Market chief operating officer Dean Rushton said the survey results showed that lenders and brokers needed to communicate more effectively about the potential savings from moving mortgages.

“The differences between lenders and the interest rates and conditions they offer has never been wider,” Rushton said.

“But our survey shows that people can’t be bothered switching banks even if they were able to save $1000 to $1500 a year.

Rushton said homeowners were often hesitant to refinance because they believed it would be too much trouble due to the fees and paperwork involved. “The fact is people can achieve significant annual savings by shopping around and getting a better deal on a mortgage with a much more competitive package,” he said.

“If you’re borrowing more than $250,000, then the savings can be even greater.”

The online poll of 380 people found 42 per cent of those surveyed would need to see potential savings of more than $2000 a year before considering switching loans.

Ten per cent said they would refinance to save $500 a year, 14 per cent to save $500 to $1000, 18 per cent to save $1001 to $1500 and 16 per cent to save $1501 to $2000.

Rushton said a mortgage broker was well placed to review an existing home loan and determine whether a borrower could obtain a better deal from a rival lender.

“Mortgage holders might have to accept some exit fees from their original lender but it can be worth it if they can negotiate a significant reduction on their interest rate,” he said.

Benefits of refinancing included the chance to reduce debt on credit cards, which often had interest rates triple that of an average variable home loan.

Source: Australian Property Investor

Glenn Stevens was out last week sounding loud alarm bells about where interest rates are headed. It seems that as the economy belts full steam ahead into what Stevens has termed the biggest resources boom since the late 19th Century, interest rates are only headed one way, and that is up.

Of course, that is unless Australia is hit by global shocks that put the brakes on our growth, but Stevens isn’t assuming that is going to happen anytime soon.

Stevens know parts of Australia are already hurting, particularly those dependent on tourism, to whom the soaring Australian dollar has done no favours. Unfortunately though, Stevens has only got one stick, and he’s prepared to use it. Even Stevens admits interest rates are a blunt instrument when it comes to keeping the economy in check. It inflicts pain across Australia, even though much of the boom is happening in the west.

It certainly will start to put mortgage holders under pressure. The Real Estate Institute of Australia says we are now heading towards the average mortgaged up household across the nation devoting 35 per cent of their income to meeting loan repayments.

In NSW, mortgage holders are already spending 38 per cent of their income on loan repayments. To put that in perspective, that’s about what people across the nation were contributing to their mortgages back in the late ’80s when interest rates peaked at more than 17 per cent.

Many people were under that same pressure before the GFC hit, as can be seen in this chart, which shows house prices growth and the percentage of income people have been using to pay their mortgage over the last decade.

David Airey, president of the Real Estate Institute of Australia, says most people can comfortably manage paying 30 per cent of their income for housing, and after that things can start to get a little tight. Obviously that depends on how you spend the rest of your money, but throw a couple of kids into the mix, and the budget starts to stretch a bit thin. Airey predicts that if interest rates climb higher, pain will start set in for mortgage holders.

So what do rises mean for you? If you have a variable mortgage, you are most likely to be paying about 7 per cent to your lender. On an average 30-year $373,000 loan, that would be costing you $2482 in monthly repayments.

There’s talk of five rate rises to come from one expert, Paul Bloxham, who recently left a job with the RBA to become the chief economist at bank HSBC. Bloxham has predicted the official cash rate could hit 5.75 per cent next year, and that there will definitely be at least one 0.25 per cent increase before Christmas. The Commonwealth Bank is talking of official rates of 6 per cent, and Westpac is betting on about 5.25 per cent.

Of course, the official cash rate is way below what you pay to your lender. So if your bank was to pass the first predicted rise on in full, you’d see your variable rate jump to from 7 per cent to 7.25 per cent before Santa arrives. That would make your monthly repayment $2545, $63 more than you are paying now.

Is Bloxham is right and are there five rate rises are headed our way? Five rises would spike your rate to 8.25 per cent and on the average new mortgage, your monthly repayments would jump to $2482, $320 more than you are forking out now. Over a year that comes to $3840.

There is always the chance that banks can increase their rates by more than the Reserve Bank does, and at least two big banks are rumoured to be considering this next time around. So you might need to factor in a bit more.

In terms of what you would be paying out of your income onto your loan, this is what could happen to the average mortgage holder at various interest rate scenarios, making some assumptions about wages growth and house price growth.

Rates rises are dependant on the economy zooming along, and there is the chance that it could go the other way. But general consensus among economists seems to be we are headed for growth.

Some people will be asking themselves is it time to fix? Fixed interest rates have been falling for the past couple of months, but are now edging back up. Australia’s largest independently owned mortgage broker, Mortgage Choice, says in the past fortnight, three lenders on its panel increased rates on one or more of their fixed rate products. The company’s weekly interest rate averages for its panel of 24 residential lenders showed a rise in the three-year fixed rate, albeit a small one, to 7.37 per cent from 7.33 per cent. Three years is the most popular fixed term.

The average one-year fixed rate also rose, from 7.02 per cent to 7.03 per cent, while the five-year fixed rate was steady at 7.81 per cent.

Mortgage Choice spokeswoman Kristy Sheppard says this compares to an average basic variable rate of 7.07 per cent and standard variable rate of 7.36 per cent.

Sheppard says choosing between a fixed and a variable home loan is a decision that must be made according to individual financial circumstances, lifestyle and future needs. There are pros and cons to each. Sometimes borrowers hedge their bets by splitting the loan between the two options.

So what to do now? The best thing is to start paying more off your mortgage. See whether your budget can cope with up to five increases, and then you’ll know how you would fare if that prediction does eventuate. Of course, you’ll also pay your mortgage off faster by jumping in with extra repayments now, and build yourself a buffer should your financial circumstances suddenly change.

Source: www.domain.com.au

Carolyn Boyd is a property journalist and keen follower of Australia’s housing market.

Have we become overly obsessed with housing affordability?

There’s been a government summit into what is shaping up as a huge election issue. Even Aussie Home Loans’ John Symond — who lives in a house estimate to cost more than $70million — is worried about affordability and wants tax breaks for first home buyers. Annoying people like myself keep writing about it.

Is anyone over it yet?

Demographer Bernard Salt says "no-one gave a toss about housing affordability until four years ago", which coincided with a housing boom and a time when Generation Y finally left home aged in their mid-20s. "Generation Y woke up and realised it was cold out there and how expensive houses were. They are the Gimme generation saying ‘I have got my Gameboy and iPod — where’s my house? I am entitled to it without putting in those boring years of saving’."

Salt says affordability is a genuine economic problem – especially in Sydney – but it has become a cultural fault line that sharpens generational and social divisions. "Sydney people especially like to exclude people who can’t afford to live in their city," he says. And we all love booming house prices if we are lucky enough to already own a house. It’s not so hot for a first home buyer trying to get into the market or renting from a landlord intent on hiking up prices.

Perhaps the frenzy of debate about affordability is concern that the wealthy, or those that saved money or had a leg-up from parents, unfairly "get ahead" of the market? In the meantime, mere mortals on the average wage are relegated to poor locations, long commute times and a life less ordinary.

"Generation Y expect an affordable house, ideally with a plasma television," Salt says."They have high expectations about jobs and lifestyle."

Basic economic theory says rents and house prices are dictated by supply and demand. Theoretically, houses can’t price themselves out of the market or become "unaffordable", as there would be no-one to buy them. Unfortunately government land release policies, immigration and finance availability affect affordability, creating housing winners and losers.

With immigration at record highs — net overseas migration was 147,700 in 2006, according to the ABS — and developers building less new dwellings than population growth dictates, some regions in Australia are on a hiding to more severe housing affordability problems. BIS Shrapnel estimates demand for new dwellings will be 169,300 per annum over the next five years, but only 150,000 will be built this year.

Macquarie Bank’s Rod Cornish argues that affordability will balance out over time, but it is a serious issue for people living in the middle and outer ring suburbs of major capital cities. "This is where affordability has deteriorated the most and where the impact of interest rates is the largest," he says.

"It will take a long period of wages rising faster than mortgage payments for affordability issues to go away." In the meantime, he says housing affordability hurts the economy by dampening retail spending and potentially harm future economic growth.

So what do you think? Is affordability an issue to worry about — or is it a load of hot air and Gen Y whinging?

Original story by Alex May