Why mortgage rates may rise sooner than you think

Economists are bringing forward forecasts for when mortgage rates will rise, with investors set to feel the squeeze.

The changing conditions raise the question of whether to ‘fix’ mortgages

Could interest rates rise a lot earlier than most people expect? Prompted by an uptick in GDP figures this week, economists are suddenly pencilling in upward moves sooner rather than later.

Even the mere suggestion we may have rate rises on the calendar will send a shiver through the housing sector where every mortgage broker and builder knows that RBA official rates could double from today’s rock-bottom 1.5 per cent and they would still barely scrape the lower range of long term averages.

And with mortgage stress indicators already rising - even before the GDP report home loan borrowers will be highly sensitive to any change in sentiment across the market. Digital Finance Analytics forecasts the number of households showing ‘mortgage stress’ rose to 860,000 households from 820,000 in August.

For all borrowers - stressed or not - the changing conditions will also raise the question of whether to ‘fix’. Many advisers are suggesting borrowers should at least consider partially fixing their mortgages with a set percentage, such as 75 per cent fixed and the remainder left in variable : Such a strategy allows borrowers to protect against future rate hikes while retaining some flexibility.

HSBC has ‘called’ an interest rate lift by the end of March next year at the latest.

Meanwhile, at NAB where the economics team had ambitiously suggested rates would not change until 2019 there is some remodelling after the GDP report with economist Riki Polygenis suggesting the RBA may hike sooner than the bank had expected.

Though banks have already been lifting mortgage rates ‘out of cycle’ severe pressure to find new ways to improve profits means the major banks will almost certainly again raise rates - both variable and fixed -once they get a signal from the RBA.

And the signals are not just emerging from lending rates - cash rates are indicating higher rates too: At HSBC where chief economist Paul Bloxham has been warning for some time rates could move faster than the market has been anticipating, the bank is offering term deposit rates - of 3 per cent for four months.

A move towards a rising rate cycle rate will pinch most severely on investors who are already paying about 6 per cent on mortgages while home loan borrowers are paying around 5.5 per cent.

One key difference this time round will be that between 30 and 40 per cent of investors are on ‘interest-only’ loans - there is simply no precedent for how this group of borrowers will react because it did not exist in any significant fashion the last time rates were moving higher on a trend basis.

Interest rate futures – a market based indicator of future rate movements currently indicate a 50/50 chance of rate rise by May.