Forums / Getting Technical / Finance / 7.25% interest rates?

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  • Profile photo of MsTrumpMsTrump
    Participant
    @mstrump
    Join Date: 2008
    Post Count: 27

    Hi,

    With current interest rates hovering around the 3.5-4.5% mark, what would the finance experts here say is the likelihood of rates increasing to their “normal”/average 7.25-7.50%? Considering most lenders assess serviceability on this basis?

    Or are the days of such high interest rates now well and truly behind us, bearing in mind we’ve had a number of years of low interest rates where the average home owner/investor is used to 4-5% rates?

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    I see it unlikely that rates will jump more than 0.25% in any one rate rise so to jump to over 7 would mean a about 12 or more rates rises.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    The average interest rate for circa 30 years was near on 7%, however as the economy is maturing in Australia towards a lower inflation environment similar more to the US/EU, I think we’ll see this trend down. I believe a year or so ago the RBA was saying they think we’ll likely see this range dropping nearer towards 6%.

    In the end lenders look at these higher interest rate figures no as they believe they are likely to hit that any time soon, but more that should such a situation arise that you can still indeed afford it.

    Interestingly most lenders also don’t just look at the 7-7.5% servicing rates internally, but will have caveats that they will increase the servicing rate by 2-2.5% above what the borrowers actual rate is if that figure is higher – for example if you were borrowing at 5.25% today, the lender might say they would increase their stress test model from 7.25% to 7.5% to add a cushion of 2.25%.

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,325

    I think the natural “order of things” should preclude rates reaching those levels. Here’s why:-

    1. Back in the 80’s when we were paying 17% Interest, the average value of a house was $50k to $100k. Also back then, yields were 10% to 15%. Yearly interest was thus in the order of $9k up to $17k.

    2. Over the 90’s, prices doubled, but Interest Rates had fallen to a range of between 7% and 9%. Interest paid per year was still around $10k to $18k.

    3. In the first half of the 2000’s (before the GFC), prices soared to become double again, and even triple what they were in the late ’90’s. Interest was around 6% to 8% then surged to 9% post-GFC and after the Rudd election. Later that year, the cash rate fell like a stone to “unprecedented levels” as the world struggled with the aftermath of the GFC.

    4. Even as the cash rate fell, Banks increased their margin from 1.3points above cash rate to 2.5 points above. Thus, the Interest rates didn’t get below 5% until these later years as the cash rate has dropped even further (currently at a Record Low of 1.5% – then add the Banks’ margin of around 2.5% to get current IR’s).

    So, even though IR’s are as low as they are, the Banks are doing “quite nicely thank you!” They get around 2.5% of each mortgage. Previously they got 1.3% of a $100k mortgage (so, $1300 a year). Today they get (e.g.) 2.5% of a $500k mortgage – so $12.5k a year !!

    On the flip side, wages growth has been minimal, so IR’s MUST stay low to prevent the economy from tanking. Any increase from current (say) 4.5% up to 7.5% is actually a 67% increase !! With no/low wage growth, I can’t see IR’s reaching anything near 7.5% any time soon.

    If the cash rate DOES go up, maybe the banks can give back some of that huge increase they have been getting by accepting a 1.3% loading once more. That could allow the cash rate to increase while not costing borrowers any extra Interest. Oh, did YOU just see that pig flying by too? It was pink and had huge ears – and it was doing at least 80KmH….

    :p

    Benny

    Profile photo of Colin RiceColin Rice
    Participant
    @fms
    Join Date: 2011
    Post Count: 338

    Depends on who you listen to?

    Some bank analysts are projecting 2 x interest rate rises in the next 12 months yet others are saying it will stay flat. I am of the later school of thought.

    RBA will likely sit on their hands until they go numb or number and will have a “see what happens” approach before making any moves.

    With banks no longer following the RBAs lead anything is possible.

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
    Email Me | Phone Me

    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

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