Never Let the Truth Get in the Way of a Good Story

Graeme Salt

Fairfax media ran a headline this week “Rate rises will increase mortgage stress: Fitch” which seemed to panic us about any possible interest rate rises.


At its heart, the article argued that, should interest rates return to recent peaks, homeowners would struggle with mortgage repayments that could increase by 40 per cent. Tucked into the bottom of the article Fitch was quoted as saying "this is not an area of major concern for us, but it does need to be monitored."


The article did accept that mortgage lenders usually test borrowers' ability to service their home loans using a buffer of about 1.5 to 2 percentage points higher than the given rates. The big four banks also use a minimum lending rate in their calculations to protect against future shocks. So, how likely is it that homeowners will soon be facing crippling home loan payments?


Blind Freddy can see that, if anything, the trajectory for interest rates is down. Sure, the Standard Variable Rates of 9.6 per cent just before the crash, make repayments hard. But we have no idea if that will happen let alone when. For all we could know, Kevin Rudd and Julia Gillard could have moved in together by then; the Wallabies could have retained the Bledisloe Cup; and Adelaide could have developed a night life!


Most economists see rates staying low for a long time. But, when rates start to rise (as they eventually will), how painful will it be? As Fitch pointed out, most banks adopt what is known as an assessment rate to judge how an applicant can repay a loan should rates go up. In most cases this assessment rate is 2 per cent above current rates. Often, loan applicants are turned down if the bank is not convinced they can make the repayments at the higher interest rate. As a result, those with limited ability to make the repayments are often excluded well before rates go up.


Also, many applicants who already have a few loans, often fall foul of the assessment rates as most lenders add a couple of percentage points onto all the loans a client may have. In fact, it is often the wiley mortgage broker who knows which lender only applies the two per cent assessment rate to their loans alone!


"it is often the wiley mortgage broker who knows which lender only applies the two per cent assessment rate "


Some clever people have argued that Australia is facing a property bubble (though I don’t agree with them). But, please, don’t tell us that our imminent risk is interest rate rises and the associated hike in mortgage repayments.