Increase in Interest Rates - Expected Impact

Same here. We bought our current PPOR in 1988 and interest rates went to 17+%.

During that time, I had an acquaintance who HP a car at 24% interest.

I couldn’t believe it. Why buy a depreciating asset at 24% - that is a hiding to nowhere!!!

 

To be clear on funding costs for banks this is a helpful article.

Study finds cash rate does not drive bank wholesale funding spreads

[Banks receive around 40 per cent of their total funding from wholesale markets; the remainder comes from deposits. ]

[But Dr Cottrell's paper, which will soon be submitted for publication in the Journal of Banking & Finance, says: "The RBA's cash rate displayed no statistical significance as a driver of wholesale funding spreads and it is these findings that are particularly intriguing given the contrasting views of the Reserve Bank of Australia."

Rather, the "statistical evidence suggests the key drivers of Australian bank wholesale funding spreads are the VIX [a volatility index], the 10-year bond yield, the bank bill rate [BBSW] and the exchange rate," the paper says. }

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So that 40% of wholesale funding is the reason why banks will have to raise rates in accordance to international rates which are largely influenced by the US FED rates which are reflected in, you guessed it, the US 10yr Bond(treasuries they call it) But being only 40%, they would only have to raise their rates by half as much to keep up.



@ MTR I believe a rate rise of 10-15 basis points on all loans from the big 4 soon just based on the spike in US 10yr from 2.4% to >2.75% recently(if this level holds for a couple weeks).

 

I'm thinking this must've been when I was in primary school. Early 80's. I remember mum and dad always fighting about money.

 

I mentioned above that drop in interest rate will trigger movement of deposits, so it's not only about wholesale funding.

 

The big one for 2018 is will we finally see interest rates rise?????
Lots of talk this will happen not once twice ???? Thoughts.... me? ... no idea

 

I second @Kangabanga but not sure about a raise this year - banks have 3 options to tackle rising cost of funds; lower employee costs, absorb it (affects shareholders) or pass on the cost to customers. At the moment, all banks are doing a lot of work around lowering employee costs.

Most corporate’s are already seeing the increase in cost of funds though.

Also important to remember that cash rate does not equal banks interest rates.

 

The problem RBA raises IR the AUD will also rise, dilemma

 

People who did that generally did very well, as rates quickly dropped to ~10% and then down to ~5%. I missed the 16% but first loan was at 10.5% which I thought was a bargain (much lower than 16%). Boom came when my holding cost dropped by 50%, down to 5.5%.

 

No, they did not drop quickly at all.
Marg

 

Maybe I forgot how long they were at ~18/16%

 

First home buyers, we thought those rates were normal. We paid our house off in no time once the rates went down. I’ve never done the uphill though.

 

"While a mortgage is considered ‘good debt’.."
SInce when is motgage considered a good debt, I would agree if the mortgage is for and IP, income generating asset, not PPOR, obviously the author hasn't read RK (Robert Kiyosaki) Rich Dad Poor Dad. RK considers PPOR mortgage as a liability and asset for the bank until it is fully paid off as it doesn't generate income if you live in it and it is non-deductable debt, hence it would not be really classified as good debt?

 

Inflation can be manipulated and statistics are just that, statistics. I don't know about you but my insurances for cars or private or IPs has been greater that 2.5% inflation each year, and commercial rent contract stipulates RBA interest rates or 3% whichever is higher (note, not lower!).
My IO rates for the next two years have actually come down from last year, from 4.44% to 3.89%, just received the figures today.
Banks funding consists of quite a lot of foreign funding hence it is becoming a larger proportion hence if US rates will go up and the cost of borrowing of the banks will go up these will be passed to us the clients, hence why Reserve Bank left the interest rates on hold for a while but they have been changed due to government interference by APRA regardless.

As Jim Rohn (JR) said, we need to be prepared for 'winters' (meaning tough, challenging times), as they will come whether we like it or not as they are there, winter will be followed by spring and summer and autumn and winter again, the seasons will occur and are out of our control, so we cannot change the seasons, we cannot change that after day will come a night and so on, representing the government changes, the economy, the regulations, we just need to prepare for those tougher times and reap rewards in good times (in summer).
"We cannot change the wind but we can change our set of sails....."
So we should reap in good times, lower LVRs, save into our buffers, equities, offsets, savings, pre-payments, etc... and then be prepared to cater for the tougher time, whatever they may be, including higher interest rates!
IMHO, no point speculating what they will be they can increase, decrease or stay for a while the same, but if you ask me what the future holds, I like JR reply, it will be just about the same as it was in the past....so what are your strategies, plan B or plan C for the future for those times?

 

How big is your mortgage?

I bet the average mortgage now is likely 5 times as much

 

RK considers IP as a liability as well in most cases. He said you make money when you buy, not when you sell, and IP can be asset only when it generates positive cash flow on long-term flat market from the beginning. This is not applicable for 95-98% of Australian IPs where you can have only a loss when the market is flat. Almost all Australian investors are expecting to get capital gain, not return from their investment... so ironically they don't follow RK who said RE doesn't have always to grow, only temporary and an investor shouldn't expect that. It is like bonus which is not guaranteed.

 

Exactly,.....cheap money means bigger borrowing (much bigger), also when interest rates go from 10% to 12%, not a big increase, but when they go from 2% to 4% your mortgage has doubled!

My 95% mortgage was 66K, when interests rates started to go up, it felt like being caught in a trap.

A lot of fish in the net this time......take care!

 

Yeah exactly. Even a tiny bit of increase would cause hugh amount of stress.

For whose who took on 1 million debt recently. Are they assuming no increase in interest rate for the next 10 years. What about increase in US interest rate? Spike in inflation driven by increase in commodity?

 

Yep! They really should go down but it seems it will go up a little before going down...

 

The big one is if interest rates rise this will see a massive impact on real estate in general, we will see a softening Oz wide.

Its not necessarily only about mortgage stress... the big one is MARKET SENTIMENT.

What happens is fear sets in and therefore more stock comes to market.

In saying this will interests rates rise?..... I really have no idea.

I guess we just need to ensure we can service debt, and if buying now make sure you can afford it if IR rise.

 

Those that have borrowed to the max thinking that at some stage Interest Rates won't rise are more than a little naive. Probably more in this category than we suspect.