Rate rise to squeeze home owners

HOME loan interest rates look set to hit an 11-year high after the RBA lifted the official cash rate by 25 basis points to 7.25 per cent.

Rate rise to squeeze home owners

HOME loan interest rates look set to hit an 11-year high after the Reserve Bank lifted the official cash rate by 25 basis points to 7.25 per cent.

Banks are now likely to push standard variable lending rates up to around 9.25 per cent - levels last seen in October 1996. This would add around $51 a month  to a $300,000 home loan taken out over a 25 year term.

Borrowers are now paying $4000 more a year on a $300,000 mortgage than if they had taken out the same sized home loan in 2004.

How bad is it?
RBA data suggests many home owners have left themselves enough wiggle room to cope with an interest rate rise, with about a quarter of owner-occupier borrowers more than a year ahead on their mortgage repayments, and about half of them about a month ahead.

But for others, this rate rise will be enough to tip them over the edge.

More than 1.1 million low and middle-income households are already in housing stress – which means they are paying more than 30 per cent of their gross income on rent or a mortgage.

If borrowers do fall behind in their payments, the Code of Banking Practice obliges banks to try to help them overcome their financial difficulties. For advice on what to do if you have fallen behind in your payments click here.

Since the RBA started this cycle of rate rises, the number of house repossession claims filed in the New South Wales Court has risen from 2189 a year in 2002, to 5454 last year.

Short rental supplies
Homeowners are not the only ones being hit by rising interest rates. Renters are also under pressure as landlords raise rents to cope with the rising interest costs. The rental market is also being squeezed by a shortage of properties. 

The Housing Institute of Australia estimates at least 25,000 more new homes need to be built each year to meet the nation’s housing demand.

The Federal Government has announced a 10-year plan to subsidise the building of 100,000 low-cost rental properties in an effort to plug the gap.

According to the Real Estate Institute of Australia, the median weekly rent for a three bedroom house in Melbourne rose 10.6 per cent in the September quarter of last year to $260 a week.

Sydney’s median weekly rent rose 9.3 per cent over the period to $295, Adelaide was up 8.5 per cent to $255, Perth rose 15.4 per cent to $300 and Hobart was up 8 per cent to $270 a week.

Political pressure

Banks are under political pressure to keep any rate rise in line with the RBA’s movement.

Generally, movements in home loan rates reflect any changes in the RBA’s official rate. But in January, the major banks hiked their home loan rates independent of any movement from the RBA, earning them a severe telling off from the Government.

Although the Government cannot interfere in banks' decisions, Prime Minister Kevin Rudd hinted on breakfast television this morning that he might consult with the competition watchdog if banks raised rates over and above the RBA's hike.