No rate hike…unless you’re interest-only

RBA cash rate hold won’t protect interest-only borrowers whose rates continue to shoot upwards

No rate hike…unless you’re interest-only
RBA cash rate hold won’t protect interest-only borrowers whose rates continue to shoot upwards

Yesterday the RBA kept the cash rate at 1.5% and lenders continued to raise interest rates regardless.

33 basic and standard variable rates for interest-only investor loans rose in the month of June, according to Canstar. There were only three decreases. Although the cash rate remains at 1.5%, the average interest-only SVR for investors is now 5.04%.

The surge of interest-only rate hikes stands in contrast to P&I variable rates for owner occupiers, where Canstar recorded 21 rate decreases and just 10 increases. A week ago CBA decreased owner-occupier P&I rates by 0.03% but increased interest-only by 0.3%. Many banks have taken a similar approach, with ING DIRECT announced a similar move just over an hour after the RBA’s rate call.

Across all lenders, the average P&I SVR for investors stands at 4.91%, for owner-occupiers 4.50%.

Bleak future for interest-only

RBA Governor Philip Lowe acknowledged rising interest-only and investor rates in his monetary policy statement, portraying them as a compliment to recent supervisory measures in tackling increased indebtness. 

Reacting to the RBA’s decision, CoreLogic’s head of research Tim Lawless also pointed to the role of rising rates: “higher mortgage rates have done much of the heavy lifting in slowing down home value appreciation and cooling investment demand.”   

“There is an expectation that mortgage rates will continue to rise”, added Lawless, “despite a steady cash rate setting, as lenders adjust their credit policies to accommodate the latest round of APRA mandates.  If this is the case, we expect investment activity will continue to moderate across the housing market, which could dampen housing market conditions further.”

Mortgage Choice CEO John Flavell went even further in his reaction:  “I would not be surprised to see the price gap between interest only loans and principal and interest loans widen to approximately 80 basis points. Anyone in an interest only loan should take the time to look at their situation and make sure they are still in the right product for their needs.”

Will the cash rate follow?

Flavell has suggested that the RBA could keep rates on hold “for several months at least” and many economists take a similar view. Savanth Sebastian at CommSec has predicted rates will remain on hold until the end of 2017.

One prominent dissenter has been HSBC chief economist Paul Bloxham, who claims that the RBA is simply waiting for wages growth to pick up: “Once there are signs that wages growth is past its trough, we expect that it won't be long before the RBA is lifting its cash rate.”

“We see wages growth picking up in the second half of 2017,” concluded Bloxham, “as a result, our central view is that the RBA will begin to lift its cash rate in Q1 2018.”