January 13, 2017
Borrowers should not expect a break in 2017 when it comes to mortgage rates. In fact, current trends indicate that rates are only going to keep going up as the year unfolds and discounts for property buyers are predicted to shrink. Triggered by what is being coined as the Trump effect’ a rise in funding costs in response to expected tax cuts and infrastructure spending in the United States, the Australian housing market is set to look like a different beast by the end of the year, shaking things up for prospective buyers, property investors, and homeowners.
This means that you may end up having to make larger mortgage repayments this year. Borrowers are already refinancing in order to switch to mortgage products with both fixed and variable components. With a fixed term, you won’t be as vulnerable to more rate hikes.
How much more will you end up paying? If home loans rise by 50 basis points during 2017 (they are forecasted to jump by as much as 80 basis points), then the average Australian homeowner will end up paying $1200 more over the full 12 months due to the higher rates. This is based on national average home values of $444,000. Depending on your mortgage and the specific circumstances of your loan product, you could wind up paying even more.
The US Federal Reserve raised rates at the end of last year, which causes the cost of international money used to fund mortgages to rise. This means that lenders all over the world, including in Australia, will have to pay more for their capital markets funding. As a response, major banks have already begun raising their own rates.
The rising rates are a sign of economic recovery in America, and should have a positive impact on the Australian economy as the dollar is expected to remain weaker in relation to the U.S. currency. However, it does cause an issue for homeowners, especially if the prospect of paying another $100 or more each month in interest on your loan sounds like an unsavoury prospect.
Although the Reserve Bank does not appear to be in any rush to raise national rates, major lenders can adjust their lending policies as they see fit in order to cope with the increasing funding costs. Australia’s largest mortgage lender, CBA, has already increased their rates. Melbourne-based ME bank increased the reference rate by 10 basis points on all variable products on 4 January.
The four largest banks in Australia, along with other lenders, have already increased their rates on fixed mortgage products.
Another impact of the higher rates is that margins the difference between the reference rate on your loan and the premium or discount that is added to calculate the interest rate are going to decrease. Squeezed margins mean that mortgage brokers will be forced to offer smaller discounts to borrowers.
Many borrowers have already chosen to refinance in order to secure better terms before the banks raise rates even more. It is also still possible that the Reserve Bank may raise national rates later in the year. Industry experts, believe that a hike by the RBA is possible and cautions that lenders are probably going to continue raising rates as funding costs are also expected to go up, not down, throughout the year.
Refinancing while rates are still low may help you to keep your mortgage payments down while the national reserve banks and major lenders continue pushing their rates up. When rates are expected to rise, as is the case now, refinancing to ensure that you have a fixed component to your mortgage will help you lock in your payments until the fixed term has ended, giving you more control over your finances, and peace of mind.
Written by Refinancing.com.au
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