highest home loan rates in 12 years lol, page-5

A lot of the doom and gloom being bandied around are from sections of the press and NGO's.

A certain section of the community will be affected. A great many lenders can offer solutions.


Rates rise - but don't panic

Malcolm Maiden
February 5, 2008 - 4:00PM

It's not all bad: the quarter of a percentage point rate rise the Reserve Bank has announced will boost mortgage costs, but of the two-thirds of Australians who own houses, only half have mortgages, and the numbers facing ruin are small indeed.

In the United States, about 15% of all mortgages are classed as sub-prime. These are loans made to people who have defaulted before, and they are the junk that sowed the seeds of the global financial market meltdown, as US rates rose, and sub-prime mortgage defaults soared.

Here, sub-prime mortgage loans are called non-conforming loans, and they account for just 0.7% of the national mortgage pool. Reports of rising mortgage stress should not therefore be confused with mortgage defaults, which are not occurring in large numbers. Credit monitoring agency Standard & Poor's has reported that the percentage of securitised home loans in arrears by 30 days or more actually fell in November last year, to a less-than-massive 0.98%, down from 1.04% in October.

The November result was the lowest arrears level for two years. Arrears in the much smaller non-conforming or sub-prime pool of securitised mortgages were higher, at 12.55%, although also down on the previous month's 12.85%.

The main effect of today's rise will therefore be not to cause credit defaults, but to add to the amount households and businesses spend on debt service, and correspondingly reduce the amount they have left to spend elsewhere - and that is exactly what the Reserve intends. Faced with rising prices in areas where capacity constraints are limiting supply in the face of strong demand, it is acting to trim demand across the board.

Whether that is the right call remains to be seen. Rates are up from a low of 4.25% in May 2002, and have risen by one and a half percentage points since May 2006, so the Reserve is pushing down on activity quite strongly.

The global economic outlook is softer now than it was when the Reserve last raised rates, on November 7, and true also that a small group of goods and services including fruit, petrol and mortgage costs themselves, boosted by earlier rate rises, are behind the move in the core inflation rate above the Reserve's range of 2 to 3%.

This rate increase also comes on top an unofficial rise that averaged 0.15 percentage points last month, as the banks shifted their rates higher in response to the credit crisis and the higher wholesale borrowing costs it has caused.

Still, it's hard to see the rate rise ending the world as we know it. the Reserve meets monthly, and can and will backtrack quickly if need be. Whether it does or not depends on how the global credit crisis progresses, and to what extent it depresses economic growth around the world, including here.

In the meantime, the Reserve has at least boosted the income harvested by Australians who are exposed to fixed interest returns - and that includes investors who have shifted more heavily into cash in response to sharemarket volatility and uncertainty.