Strong economic growth, if sustained, could lead to an increase in rates.
However, the ASX futures market, armed with these positive economic growth numbers, are still predicting stable interest rates for a while to come (see below).
We have a contrary view. Although there will always be individual circumstances where people unfortunately find themselves in mortgage stress, the majority of borrowers are prepared to handle a modest increase in interest rates. This view is based on two key points:
1. When banks assess a clients ability to repay a loan they use a “test” interest rate that is almost always above 7.00% p.a..
This means that most variable rates would have to increase by around 2.50% before clients could potentially struggle. In fact some lenders assess repayment capacity at 8.00% p.a., which is nearly double the current interest rate.
2. The average monthly variable interest rate over the last 10 years is approximately 6.71% p.a. (see below). So the “test” rate is approximately 0.30% p.a. above the long term variable interest rate.
As you can see, our banks have and are adopting quite conservative lending practices. Australian banks are arguably some of the most prudent financial institutions in the world. This conservative lending approach underpins the current price growth that we are seeing in some of our Capital cities. Far from contributing to house price growth, we feel that current lending policy is keeping a lid on the market.
So if you can afford it today, in all likelihood you will be able to afford it tomorrow and if you are concerned about interest rates rising and the impact that they may have, perhaps its time to talk to Margaret Godfrey Mortgage Broker Newcastle about fixed rates, which while offering less flexibility, provide certainty as to repayment.