Mortgage Rates

How do you increase mortgage charges with out truly elevating them? | Greg Jericho

TIf you are lucky enough to be able to afford a home purchase loan, you now have to prove that you can pay 3% above the interest rate offered by the bank. It’s a new measure that, ironically, wasn’t introduced to ensure that people could pay when tariffs go up, but because tariffs won’t go up at all.

What if the cash interest rate is 0.1% and the average mortgage rate of 3.03% is well below that of the last 60 years?

As we all know, real estate prices are rising.

That spike means we’re on the verge of breaking the record for the size of home debt to income:

If you don’t see the graphic, click here

This is unsustainable in the face of our weak economy, but when you are the reserve bank you don’t want to raise interest rates to stop prices from rising because that also increases corporate lending rates and would hurt the same weak economy.

How do we know the economy is weak? Well, to begin with, the cash rate is 0.1% and the government is currently in deficit of $ 134 billion.

That only happens when things don’t go well. Despite all of these massive incentives, wages are still barely rising by 2% and the RBA does not expect inflation to exceed 2.5% until at least 2023.

And yet property prices are exploding.

So what to do

The answer is macroprudential tools.

These are measures in which central banks and regulators try to tighten monetary policy without raising interest rates.

Often they are introduced out of concerns about the instability of the financial system.

For example, the first macroprudential instrument introduced in Australia was the Australian Prudential Regulation Authority (Apra), which notified banks in 2014 that annual investor credit growth of more than 10% would be treated as a “key risk indicator” (i.e. leave it not happen). ).

But right now, loan growth is nowhere near 10%:

If you don’t see the graphic, click here

The concern now is house prices. They’re skyrocketing, and yet the RBA can’t raise rates for fear of dealing a blow to the rest of the economy.

Instead, Apra has announced that banks must ensure that borrowers can afford a home loan if interest rates rise by 3 percentage points instead of the previous “buffer” of 2.5%.

In fact, this increases interest rates without doing so.

Right now, the average mortgage rate being paid by owner-occupiers is 3.03% (and if you pay more, call your bank and request a rate cut):

If you don’t see the graphic, click here

If you live in New South Wales, for a 25 year loan with an average mortgage of $ 750,784, that means your monthly repayments are $ 3,573.

In the past, however, banks would have checked that you could pay $ 4,624 a month – the payback is 5.53% (3.03 + 2.5). Now the banks are checking if you can pay $ 4,852 – the repayments on a loan are 6.06%:

If you don’t see the graphic, click here

But the chances that you will ever have to pay that amount are very slim.

A massive economic boom would be needed for interest rates to rise by 3 percentage points. Note that during the mining boom in the early 2000s, it took six years for average mortgage rates to rise from 6.07% to 9.34%.

We won’t have such a boom in the foreseeable future.

So the RBA and Apra are not worried that people will soon be unable to repay their loan.

But it also means the RBA (and homebuyers) know that interest rates are not going to rise for a long time, and probably not much then either. And this situation is ripe for booming property prices.

These measures effectively reduce the number of people who can be approved for a loan. Because the lower the growth in home loans, the lower the growth in house prices.

If you don’t see the graphic, click here

So if you live in Victoria, for example, you will be asked if you can afford an additional $ 1,060 per month for a 25 year loan instead of $ 872 as was the case with a 2.5% buffer:

If you don’t see the graphic, click here

Given the additional $ 188 per month, it is clear that the RBA and Apra do not want to massively stop borrowing – they just want to curb it.

But those higher buffers also suggest that the RBA isn’t about to hike rates – because you’re only pursuing macroprudential instruments when the other rate hike instrument needs to stay on the shelf.