RBA cash rate

[basilio]

I think we are in unchartered waters at the moment. We have never had home loan rates under 2% - until last year. The average home loan is now $500k. Realistically it's probably more. If we suggest median wages are $80k then these $500 k loans are 6 times yearly earnings. That is historically very high.

However if interest rates do go up by 2% then we will see home loan rates around 4.6- 5% mark . This will double the loan repayments.
How will that scenario play out on stretched household budgets ?

It's all in the maths. A 2% interest hike on a 6% loan is effectively a 33% increase in repayments.
The same 2% increase on a current 2% loan is a 100% increase in repayments.
A 3% increase will result in a 150% increase in repayments

 

[Smurf1976]

It's all in the maths.

Not wanting to sound elitist but it always amazes me how many are apparently unable to apply really simple maths, early high school level at the most, to real world situations.

There's no need for complex formulas here, just basic math and that's all.

Edit - note that comment's referring to the general population not to basilio's post.

 

[divs4ever]

I think we are in unchartered waters at the moment. We have never had home loan rates under 2% - until last year. The average home loan is now $500k. Realistically it's probably more. If we suggest median wages are $80k then these $500 k loans are 6 times yearly earnings. That is historically very high.

However if interest rates do go up by 2% then we will see home loan rates around 4.6- 5% mark . This will double the loan repayments.
How will that scenario play out on stretched household budgets ?

It's all in the maths. A 2% interest hike on a 6% loan is effectively a 33% increase in repayments.
The same 2% increase on a current 2% loan is a 100% increase in repayments.
A 3% increase will result in a 150% increase in repayments

the compounding problem is the mortgage repayments will NOT rise alone , one would expect other costs and fees to rise as well ( but probably not in lock step )

now GMA ( i do not hold ) might be something to think about here , will it benefit or be ravaged in the mid-term , also watch the banks and home-lenders will they keep the mortgages on the books or package them up as financial products and sell them ( to say super funds )

i absolutely agree on uncharted waters

 

[wayneL]

... and just chucking in something in for a bit of food for thought, the reserve bank can still raise aggressively for several cycles and we will still have negative effective interest rates.

Is that sustainable?

 

[divs4ever]

Not wanting to sound elitist but it always amazes me how many are apparently unable to apply really simple maths, early high school level at the most, to real world situations.

There's no need for complex formulas here, just basic math and that's all.

the simple math says many are in trouble ( SOON ) , the complex math tries to guess how deep is the trouble and can we make a career of persistently guessing wrongly .

now the savvy investor is looking for that profitable angle . currently court cases seem to drag on and on , so i will be ignoring the law firms , companies buying distressed debt might have a bright future ( i hold CCP already up more than 300% for me ), as might companies that run auctions ( on autos, boats , distressed property , etc ) and don't neglect those banks/home lenders as the carnage unfolds ( assuming they aren't forced to 'bail-in ' , which is now possible )

 

[divs4ever]

... and just chucking in something in for a bit of food for thought, the reserve bank can still raise aggressively for several cycles and we will still have negative effective interest rates.

Is that sustainable?

well they seem to be so far behind the curve , they can probably aggressively raise rates without a positive outcome ( i suggest a negative outcome will arrive eventually , but when will that 'show-stopper occur )

depending on your opinion of the GFC and steps taken to ' recover ' is 14 years ( of can-kicking ' ) sustainable in your eyes ,
but here we are in a train-wreck pushing up daisies and comparatively happy about that ( or at least that is the narrative )

 

[greggles]

As interest rates rise this year, I suspect that those who are able will start pulling money out of equities and managed funds to service their mortgages. I further suspect that the first funds to be pulled will be out of those micro investing platforms such as Raiz. All that saved lockdown money that people were going to spend on holidays to Bali will probably end up servicing mortgages.

The real pain will be felt by those who overextended and bought houses that they really couldn't afford. Those on lower incomes will feel the pinch most.

 

[divs4ever]

As interest rates rise this year, I suspect that those who are able will start pulling money out of equities and managed funds to service their mortgages. I further suspect that the first funds to be pulled will be out of those micro investing platforms such as Raiz. All that saved lockdown money that people were going to spend on holidays to Bali will probably end up servicing mortgages.

The real pain will be felt by those who overextended and bought houses that they really couldn't afford. Those on lower incomes will feel the pinch most.

that sounds like a reasonable analysis to me

lucky for me i live a low-debt life and my last overseas trip was in 1990 ( and grew up in a low-income household and have resisted many modern devices and services along the way )

however plenty i know live an affluent life-style and know how to navigate that choice ( so far )

am ready for some forced selling into the market ( to add to the current holdings ) , i just don't know when it will gain traction ( these persistent down days must be getting some margin-lenders nervous )

 

[divs4ever]

Australia Shocks With Bigger Than Expected Rate Hike, As Lowe Admits Embarrassment At Being So Wrong
https://www.zerohedge.com/markets/a...hike-lowe-admits-embarrassment-being-so-wrong

so wrong he has no idea how wrong he is , and isn't as though he wasn't getting indications from outside Australia

BUT is he embarrassed enough to resign ?? that is the question

 

[Smurf1976]

Australia Shocks With Bigger Than Expected Rate Hike

Bigger than expected by whom?

Interest rate movements in 0.25% increments have been a standard practice for quite a while now, to the point that any movement by a different amount would be notable.

 

[divs4ever]

APPARENTLY several analysts predicted a 0.15% rise to bring the rate to 0.25%

now personally i was surprised they hiked at all on Tuesday ( yesterday ) since there is a Federal Election campaign in progress

normal RBA convention is that the RBA avoids interest moves during election campaigns lest they be accused of trying to influence the election outcome ( the RBA tries to appear politically neutral , usually ) , so any move was unexpected by me ( despite the acceptance that they really need to RUN to catch up to the current 'official ' inflation )

since there has been a suggestion the RBA desires to get to 2.5% by December this year ( or i have seen a 3% prediction )

will the rate increase stay at 0.25% per rise , or will they go for bigger jumps

fun research would be a quick revisit to the lead up to the 2018 taper tantrum ( so 2.5% might trigger a massive policy reversal )

 

[Dona Ferentes]

...............
Almost by definition, the RBA will lag the bond yields. It will be interesting to see how high cash rate will go. A high 2 or something in the 3's?

Latest yields, after the RBA announcement

• 2 year yield: US 2.78% ; Australia 2.72%
• 5 year yield: US 3.02% : Australia 3.19%
• 10 year yield: US 2.98% ; Australia 3.39%

 

[Value Collector]

I think we are in unchartered waters at the moment. We have never had home loan rates under 2% - until last year. The average home loan is now $500k. Realistically it's probably more. If we suggest median wages are $80k then these $500 k loans are 6 times yearly earnings. That is historically very high.

However if interest rates do go up by 2% then we will see home loan rates around 4.6- 5% mark . This will double the loan repayments.
How will that scenario play out on stretched household budgets ?

It's all in the maths. A 2% interest hike on a 6% loan is effectively a 33% increase in repayments.
The same 2% increase on a current 2% loan is a 100% increase in repayments.
A 3% increase will result in a 150% increase in repayments

I think the saving grace will be that the majority of people with loans older than say 4 years are ahead in their payments, due to continuing paying their mortgages at the same rate even though their interest rates were dropping.

I might try to find the presentation later, but I remember seeing a CBA presentation that showed over 50% of borrowers were were well ahead on their mortgage (from memory I think it was 3 or 6 months ahead)

What this means is that they might be paying $2500 per month even though their required payments on current interest rates are $1800, and each month that they pay that extra $700 it has been reducing their loan faster and therefore reducing the required payment even more down to say $1799.

But now that interest rates are rising the required payment will rise, but their current payments are already much higher than the required that it won’t change their payment for a fair while.

Eg if they are paying $2500, and the required payment rises from $1800 to $1900 nothing changes for there monthly budget, they continue paying the $2500 and will continue getting ahead just at a slower rate.

As long as interest rates don’t spike to quickly there is a chance their required payment won’t ever rise above $2500.

————————————
Of course if the person reduced their payments as the internet rates reduced, or if they have a young loan of less than 3 years they would have such a large buffer accumulated.

 

[Dona Ferentes]

I think the saving grace will be that the majority of people with loans older than say 4 years are ahead in their payments, due to continuing paying their mortgages at the same rate even though their interest rates were dropping.

I might try to find the presentation later, but I remember seeing a CBA presentation that showed over 50% of borrowers were were well ahead on their mortgage (from memory I think it was 3 or 6 months ahead)

Yes, I remember something similar, from a few months ago (and I may have even dropped it in a thread on ASF somewhere - was looking for it). In fact it may have even been along the lines of something like 70% have some buffer in their offset accounts, of several months.

Part of the savings were from the Covid-induced changes in spending patterns and part was that blind Freddy could see there was going to be a situation like now happening sometime. Now the action of raising rates has been established, then how far up they will go is the big unknown.

 

[Belli]

To be honest I haven't bothered concerning myself about the effect of an increase in interest rates on borrowers but I thought the lenders factored in the impact of a rate rise on an applicant if rates increased and approved a loan on that basis. I could be incorrect of course.

Haven't had any debt, not even a credit card, for many years now so on a personal basis I'm in the "don't give a toss" brigade .

 

[qldfrog]

To be honest I haven't bothered concerning myself about the effect of an increase in interest rates on borrowers but I thought the lenders factored in the impact of a rate rise on an applicant if rates increased and approved a loan on that basis. I could be incorrect of course.

Haven't had any debt, not even a credit card, for many years now so on a personal basis I'm in the "don't give a toss" brigade .

But you probably care about inflation, bond TD rates and markets .so you care?

 

[againsthegrain]

But you probably care about inflation, bond TD rates and markets .so you care?

Im in both the categories and worry about the inflation, probably just as much as someone with xxx debt Im somebody with xxx cash have just as much to lose

 

[Belli]

But you probably care about inflation, bond TD rates and markets .so you care?

You have made incorrect assumptions.

 

[qldfrog]

You have made incorrect assumptions.

Good on you if you can be inflation proof?

 

[Belli]

Good on you if you can be inflation proof?

It isn't that actually. A number of the components (education, white goods, alcohol & tobacco, house purchase, etc) in the CPI do not apply to me. For the others such as fuel costs or groceries, any actual monetary increase is minor - about $400 pa combined I estimate - and is easily accommodated within my finances and so I have no need to care about it.