Borrowers urged to brace themselves for 8 rate hikes

Adam Smith 20 July 2017 NEWS

house graph paper1Home loan lender ME has urged borrowers to prepare themselves for rates a full 2% above today’s levels.

The bank has predicted that rates could rise eight times, pointing to the minutes from the Reserve Bank of Australia’s (RBA) July meeting. While the RBA left the official cash rate on hold at 1.50%, the board estimated that a “neutral” interest rate in normal economic conditions would be 3.5%.

According to ME, a rise of this magnitude in the official cash rate would take the average home loan interest rate from 5.3% to more than 7%. On a $500,000 home loan, this would amount to nearly a $550 rise in monthly repayments.

“It’s been an extraordinary downhill run for interest rates since late 2011, taking the official cash rate to a historic low of 1.5% by January 2017, but things can easily go up as they can go down,” ME head of home loans Patrick Nolan said.

While Nolan said banks typically apply stress tests, adding a 2-3% interest rate buffer when assessing a borrower’s ability to repay, he said borrowers needed to take responsibility to ensure their own ability to handle higher home loan interest rates.

Nolan urged borrowers to look at making extra repayments while rates were still low as well as scaling back other debt and considering fixing their home loan rate.

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