What’s going to happen to home loans in 2017?
As we all know the major banks and many of their second tier lenders have raised fixed rates on home loans and investor loans. So what does this mean for the average homeowner with a home loan, or an investor with an interest only loan?
The last 10 years have been truly tumultuous in many ways and the effects of the downturn are still being felt. The environment of low interest loans has led to a huge rise in property and asset value across Australia and there is now some concern as to what will happen next.
As discussed in a previous blog article, we pointed out that the era of low interest rates probably wouldn’t last, and we were correct. There are a number of factors driving this change.
How the Federal Reserve rate rise affects you home loan
There is still uncertainty that the Federal Reserve (the Fed) will raise rates in December. The markets are pointing to a 63% possibility that it will happen but there are still a number of mitigating factors that are keeping people guessing.
Donald Trump’s win has added an other bit of complexity to the mix and probably wasn’t something the Fed saw coming. There has been some recent difficulty in Europe with Italy losing another Prime Minister and the banks being sold off. A number of major Italian banks (including the world’s oldest) are in the middle of trying to raise funds to deal with a chronic bad debt problem. Could these banks go under? Quite possibly, and with the European Commission’s stance on saving banks (not to) then it may present as a real possibility.
There are internal issues and external issues the Fed need to be aware of but what is happening is the US economy is growing again.
Australia’s credit rating
There has been a lot of talk recently around the possibility of Australia’s credit rating and the possibility that it may drop from the current AAA rating. As of 20th December all three credit ratings agencies left our rating unchanged. But that is not to say that may change in the future.
Our credit rating is very much like a health report, the Government needs to rebalance the budget and get our economy moving or the rating may be re-evaluated. This is all well and dandy but how does it affect your home loan?
Quite simply, if your credit rating drops then we are seen as a higher risk. This means borrowing costs will most probably be higher for both Government and commercial institutions, if this does occur it will filter to your home loan.
A lower credit rating will mean your home loan interest rate will go up.
A volatile world
As we have discussed in previous blog posts markets do not like volatility. Now that the election in the USA has been settled markets have swung upwards, this may be a reaction to Mr Trump’s big spending plans, or just the fact that at least we know who will be in the chair for the next 4 years. There has been a lot of cash sitting on the sidelines and maybe they are now piling into markets.
What is not good is what is that the world is very unsettled at present. The issues in Syria are not resolving themselves. China’s incursion into the South China Sea and Russia’s ambassador to Turkey being assassinated can make for very unsettled times.
How markets and federal banks will react in the next year remains to be seen but sometimes it takes only a small spark to start a cataclysm.
The Reserve Bank of Australia
The Reserve Bank has chosen not to raise rates at its latest meeting. It relies on data provided by the Government to make decisions and although we have had a fantastic run there is some scepticism as to whether our economy will grow in the near future and this is is the case the RBA uses to keep rates low.
By not keeping in step with the Federal Reserve the Aussie dollar drops against the US dollar which makes our exports more attractive to the rest of the world and stimulates the economy. Will the RBA raise rates in the next year? We would bet on it. The US Fed has intimated it may raise rates at least twice more next year, there will need to be some movement in the cash rate here or net importers will be severely affected. When they pull that lever is anyone’s guess.
What are your choices?
Will rates go up? That’s pretty much a dead certainty. You can protect yourself now by locking in a fixed rate term but at the very least do your sums and talk to your financial adviser on how the rate hikes will affect you payments in the future.
2017 will prove to be a very interesting year.