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Money Up to 1 million households set to go into mortgage default by September, analyst warns

05:55  11 july  2018
05:55  11 july  2018 Source:   abc.net.au

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© Provided by ABC News One analyst tips the big four will raise interest rates by September . Up to 1 million Australian households could be at risk of mortgage default by September .

That's the warning from one independent analyst , especially if the big four banks do what many fear they will do and increase their interest rates by as little as 0.15 percentage points over the next few months.

One analyst tips the big four will raise interest rates by September.© Provided by ABC News One analyst tips the big four will raise interest rates by September.

Up to 1 million Australian households could be at risk of mortgage default by September.

That is the warning from one independent analyst if the big four banks do what many fear they will do and increase their standard variable rates rise by as little as 0.15 percentage points over the next few months.

"I'm almost certain they'll be forced to lift those rates, it's a question of timing, and of course the political reaction when it happens," Digital Finance Analytics principle Martin North said.

A significant portion of Australia's banks have already started to lift their interest rates.

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Macquarie Bank — not one of the big four, but with similar access to funding as the big four — will raise variable rates on its owner occupier loan products for those paying principal and interest by 0.06 percentage points on Friday.

Those paying off interest-only loans will have their rate increased by 0.10 percentage points.

It follows similar moves by AMP, Bank of Queensland, Suncorp, and ME Bank.

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So the big question is, when will the ANZ, Westpac, CBA and the NAB move their rates higher?

"I think that by September we will see these rate rises in place, unless the international financial markets change direction quickly," Mr North said.

"The pressure is building and it will continue to build.

"We're going to see the Federal Reserve raising rate further in the US.

"We've seen the funding costs really not adjusting back very quickly, so I think they've probably got to do something."

What will Australia's biggest home loan provider do?

The Commonwealth Bank is Australia's biggest home loan provider.

The ABC asked the bank's chief economist, Michael Blythe, if he could shed some light on when the CBA would make its move on interest rates.

"Well look all banks are facing the same issue," Mr Blythe said.

"Part of that funding pool that they draw on, be it domestically or overseas, we have seen some upwards pressures on interest rates in those areas."

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Queensland Investment Corporation's director of research, Katrina King, was a little more forthcoming.

She explained that the banks are facing increasing pressure from shareholders to maintain their profit margins, and that means they will raise their rates soon.

"I think that they do have to listen hard to their equity investors, and with their cost of funding increasing, this may be some way to alleviate the pressure on their net profit, and the expectations for their profit, and be able to reward their shareholders," she said.

"So the pressure's certainly there."

Ms King said most households could relax though because she expected interest rates to only move up a fraction from where they are now.

"With the sort of funding pressure we've seen in the front end, they may only need to raise rates 7 to 10, maybe 15 basis points (0.15 percentage points) in order to alleviate the pressure on them."

'975,000 … are right on the edge now'

Mr North is not as relaxed as Ms King.

He said he expected the big four will increase rates on standard variable mortgage rates by at least 10 to 15 basis points, or 0.15 percentage points, to cover the increase in their cost of funding.

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Mr North has been quoted widely warning of the dangers of raising interest rates while many Australian households are already suffering mortgage stress.

He warned a 0.15 percentage points increase in interest rates would push roughly a million Australians into mortgage default.

"Today 975,000 households across Australia with owner-occupier mortgages are right on the edge now," Mr North said.

"And there are around 50,000 who are already over the edge and are looking like they could default.

"If rates went up by 0.15 percentage points, that would go up closer to the round million."

'This is all part of building more pain in'

The mathematics are not complicated.

In Sydney, for example, a household with a $750,000 mortgage would have to pay an extra $60 a month if their interest rate rose by as little as 0.10 percentage points.

"But it's that marginal borrower, it's the borrower who is already up against it, who's got little wiggle room, who's already struggling with childcare costs, fuel costs, electricity costs," Mr North said.

"Even a small rise, and remember that the income growth is nowhere, and costs are beginning to rise, so this is all part of building more pain in."

The Reserve Bank has made it clear it is in no hurry to raise interest rates.

But Australia's banks do not just follow the Reserve Bank's moves on rates; they are also dependent on interest rate rises in other money markets.

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The cost of sourcing funds is rising overseas, especially in America.

But the cost of borrowing money domestically, from within Australia, is also rising.

That is because the Trump administration has asked many major US companies to pull out from offshore investments, including in Australia, as part of its tax policy.

As companies like Google and Microsoft withdraw funds from Australia's money market, the price — or interest rate — of the remaining funds goes up.

"It's become significantly more expensive for Australian banks to fund themselves," Ms King said.

"For example, a three-month bank bill swap rate [short-term money market] was about 1.7 per cent through most of 2017, and is now 2.1 per cent, so it's costing them a lot more to fund."

It raises the question of whether the nation's central bank will actually step in to ease the pressure on Australian households by cutting the cash rate.

AMP Capital's head of investment strategy, Shane Oliver, argued that the Reserve Bank may well be compelled to cut interest rates, and not just to relieve household debt stress, but also to keep the entire economy afloat.

"It's hopeful that the consumer will eventually come to the party," Dr Oliver said.

"The risk is that'll take longer than expected, and the Reserve Bank will have to stay on hold for a lot longer.

"In fact we don't see the RBA raising interest rates until 2020 at the earliest, and I'd have to say, you still can't rule out the next move being a cut, rather than a hike."

Higher mortgage rates may not alleviate the margin squeeze faced by Australia's big banks .
Higher bank funding costs have led analysts to speculate whether Australia’s big banks will lift mortgage rates. Bank funding costs are currently one of the central talking points in Australian financial markets.

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