Mortgage Interest Rates: Why the RBA is leaning toward a rate cut in Oct 2

Will the RBA Backflip to Lower Interest Rates?

In September the RBA saw no reason to change interest rates.
Now two weeks later the financial experts are saying that the Reserve Bank of Australia is preparing the markets for cuts to interest rates? It apparently won't need to see the inflation figures due in November to make the move. Obviously there are things that the RBA board members didn't see as important then, that have now emerged.

Suddenly the RBA signalled its new bias towards an easing on October 2 in a statement released by its governor, Glenn Stevens, after yesterday's board meeting in Sydney

How things have changed since August.

It was just in August that optimism ruled the RBA's statements on the World Economy. In particular that China's growth appeared to have stopped slowing. yesterday's updated assessments of international conditions is now more subdued. 

Australian Banks are lowering their mortgage rates independent of the Reserve Banks

Just weeks ago the Big Four banks were not passing on the RBA rate reductions.
Now the CBA has about faced and  lowered its fixed rates by up to .4%. What's that all about? First they say they can't afford it, then drop their pants weeks later?

When the big banks broke ranks with the RBA on interest rate reductions, they broke the pact with the RBA to support the Banks. That is a dangerous move and the banks seem to be thinking that through.

Europe's economy is still going backwards

Anyone that thinks that Europe has fixed its problems with Greece, Spain and Portugal isn't thinking straight. It will be 5 to 10 years before these problems have been ironed out.

Growth in the US was ordinary

The US economy is still in a hole. Its climbing out of a creator left by Bush's scatter brained bunch. What if the Party that caused that hole gets back into power again in November. Another disaster looms large in my view. 

Obama promised blue skies, and then discovered the economy was trashed by years of Republican actions. 

Clearly Obama should have been straight with the people once he discovered the Gravity of the mess he found. He should have told the US that they had an eight year hole to fill. Then the Republicans blocked his efforts at job creation. And now people belief that the Republicans can fix things? We have the same problem in Australia. A hostile opposition party trying to hold Australia back. 

The biggest problem I see for the  US is  property prices increasing and then mortgage rates increasing, and then the Republicans getting the population to work for less money. Either way, home prices in the US are down for years.

China had uncertainty about near-term growth

China has so many areas it can grow in, but right now they don't know which way to go, and even their Premier says the economy is disorganised. When it gets it's act together the growth will continue. 

The RBA is very concerned the big falls in "some coal and iron ore prices of importance to Australia, are not being reflected in the Price of the Australian Dollar

This is the dilemma that we face. The Australian Dollar is overpriced at its current value, given these in massive falls resources prices. But when those prices fell, the Australian dollar held up. That need to change.

It seems that the Australian Dollar is too attractive in an uncertain World, and paying good interest rates compare to other Countries. 

So if the RBA wants to shake this inertia, it might be thinking more than one reduction to get the momentum for a lower dollar in motion.  An Australian Dollar at 90 Cents US would make our economy so much better.

Food Security a hot topic, but not on the RBA radar?

One thing the RBA has not mentioned is Australia's bumper wheat crop in a hungry World.
Food security could be a factor just when Australian wheat growers are having a bumper crop, and major wheat producers like Russia, the US and Canada are having poor crop harvests.
So Australian Farmers are expecting a once in 20 year win on the grain prices, just at the very time that World Leaders are stating that Food Security is the future concern.
So Australia gets lucky again!

Miners pull back on projects

Lesser factors are the pull back of mining projects. Clearly, if all the projects talked about came on stream, there would be to many projects and no enough skilled people to handle them. And many Australians don't want to import workers for the purpose of bringing these projects forward.

Fortescue Metals Group became the first big resources company to scale back an investment program [funny about that] until prices recovered. Whilst the RBA has to consider the announcement as factual, you have to wonder at their real motive in this.

As the Prime Minister has said
"This is a boom with three distinct phases: a prices boom, which is now passing, an investment boom - still to reach its peak - and a production boom for the years and decades ahead."

Will Australia's inflation stay low with the carbon tax?

Economists have said that Australia's inflation rate is unlikely to climb above 3 per cent for the next one to two years, even with the Carbon tax effect added.
The RBA may well ignore the carbon tax inflationary effect, so that even a 3.5% inflation rate could be seen as within its comfort band.
The one thing that has not been looked at is the inflationary effect of a World wheat shortage on grocery prices. Wheat is just about everything that is in a packet these days.

Summary on Mortgage rates

The RBA seems to have gone from "no need" to reduce interest rates, to being concerned about the US, Chins, Europe, Asia and the sudden drop in commodity prices, whilst the dollar hangs too high. It clearly sees that the Dollar has to be forced to come down hard.
At the same time the CBA has reduced deeply its fixed rates interest on many home loans. A give away that it sees mortgage rates heading lower, and that competition in the mortgage market is heating up on thin home loan sales.

Home loan views sourced by Mr Mortgage

Which Way for Mortgage Rates as Homeowners feel Mortgage Stress

Mortgage stress and loan repayment arrears are becoming a growing reality for Australian Homeowners in New South Wales, Victoria & Queensland.

A growing number of mortgaged homeowners are feeling the pinch and mortgage payment arrears are rising to 2 percent in some areas of Australia. Whilst this is still tiny compared to what has happened in the US, it should be a red flag to the RBA when considering any further rate rises. In fact some are now believing that the next interest rate move could be lower.

What percentage of income creates mortgage stress?

All I know is that the old standard when we had many single income families in Australia, in the 1960's to the1970's that it was hard to get a mortgage without 20% deposit, and that 30% of your gross income on your mortgage was the limit you could go for.
This had the effect of suppressing real estate values.

And don't forget that income tax was at higher rates than it is today, so meant the average family was always squeezed. The other thing that happened in that era was constant wage increases and that soon made mortgages easier to cope with. That is just not part of the landscape these days. Successive Governments have opted for tax cuts as a way of moderating inflation and improving cash-flows on a household level.
So wage increases are few and far between in this period, and much more gradual than in those days. The result is that people who swallowed more they can chew today, have to put up with many years of indigestion in what we call mortgage stress.Its not something that we get into and inflation takes us away from anymore. Its around a lot longer.

The other big change is real estate value increases. In the sixties and seventies we saw a lot of home value appreciation, but for the passed four years we have seen little by way of property price rises, and some areas we have seen house prices fall recently, and it can make the pain of mortgage stress a lot harder to cope with. When property values slide backwards, it can give you that sinking feeling, especially if you find yourself underwater, meaning that the debt is larger than the equity of the property.

The Reserve Bank of Australia Moves interest rates in Mysterious ways.

My view is that the RBA rate rise in November was one rate rise too many, and many on the RBA are beginning to see that this was the case. That's we are getting interest rate rise talk, without the action.

Will we see a rate rise or a rate drop next time?

Earlier in the year my bank manager asked me if I wanted to re-fix my mortgage as it came out of a very attractive fixed rate. They thought they were doing me a favour. I told them no, because I could not see how a rate rise was possible. Well, my variable rate is still under where the fixed rate would have been set, and variable rates could go lower. Now some brave traders are betting on the next move in interest rates to be lower down in Australia. More about that below.

The reasons Lower Interest rates may happen

There were plenty of reasons for this, and they all have resurfaced now because they never went away. They are weak house prices and housing demand, slow wage growth, low retail spending, a shift to saving over spending that is seeing savings rise. Also the Euro debt crisis is yet to be behind us, and the US could double dip into another recession.

Currencies traders are starting to bet that Interest rates will fall in Australia.

Most economists say that one or two rate rise are possible later in the year. But some currency traders are now betting that the next rate movement by the RBA will be down, not up.
So any homeowner trying to sell a home right now, any home buyer looking at buying a home soon, and any real estate agent or mortgage broker wanting more business would be praying that a rate drop will come to pass.

What will happen to homeowners if mortgage rates don't fall?

If interest rates don't go lower, but rise instead, borrowers with only average-size mortgages in Sydney and Melbourne will be on the verge of ''mortgage stress''. And homeowners with mortgages that are bigger than average could be in for a lean ride. The experts say that a household is under mortgage stress once home loan repayments take up more than 30 per cent of gross income, according to some. But they are talking about two income families. It would make more sense for people know what their maximum mortgage repayments should be as a percentage of their net incomes.

Part of the problem here, is how much other debt are these people carrying, and how they are affected with other price increases. That includes petrol, electricity, gas and food. All are rising way faster than inflation and that has to be making it harder for all home buyers and mortgage holders to cope with mortgage payments.

Source: Mr Mortgage

Credit Cards: Green Bandt to ban Hole in the Wall cash bandits.

You'll "get more green out of your ATM cash machine" soon if Andrew Bandt gets his private members bill over the line.

Bandt's bill has the attraction factor

Green Andrew is proposing a ban on those $2.00 ATM transaction fees for withdrawing cash.
Politicians from the entire spectrum are liking his tune and are backing Green MP Adam Bandt's private member's bill.
Bob Katter also stuck his boot into the Government and Opposition for skinny policy offerings, though Labor Treasurer Wayne Swan has been holding its cards close to it chest. He is expected to release his plan for banking reform later this month.
Though Independent MPs Andrew Wilkie, Tony Windsor, Rob Oakeshott and Bob Katter and unaligned Nationals MP Tony Crook said Mr Bandt's bill, now before Parliament, was the most promising proposal on banking, they have yet to see the Labor Plan, but I suspect that it will be more wide ranging in terms of offering real competition to the major banks than Andrew bandt's bill. Let's wait and see on that one.

Call to action to stir Wayne Swan

The calls to action increases the pressure on Treasurer Wayne Swan, who will next month announce banking reforms that could need the support of the crossbenchers.
The banks' all claim that politicians did not understand that funding costs were going up. Wilke says that this core claim is nonsense.
Mr Katter said the surge in banking chiefs' salaries also warranted attention and could be curbed through the tax system.
Mortgage Foreclosures unfair.
He called on the government to do ''something serious'' about the system of mortgage foreclosure, which was weighted in lenders' favour.

Summary of Bandt's Bill

As it stands, Andrew Bandt's proposed bill has three main areas of saings for Australian Credit users.

1. A crackdown on Bank Fees.
2. Mortgage Rates to move in line with RBA increases
3. A ban of bank transaction fees of $2.00 per transaction.

Whatever the outcome, it looks like Australia's Parliament is in for a lively time on the floor next year, and home buyers can look forward to more and better loan offers from nonbank players, lower mortgage interest rates and lower fees, no to low exit fees on their mortgages rates, and credit card losing unfair fees. Sounds good to me.

Greedy banks to raise your mortgage interest rates above the RBA moves

CBA, Westpac, NAB and ANZ are tipped to raise mortgage rates over any RBA rate rises to fatten record profits.

Homeowners and home buyers are being warned to brace for their favourite bank to lift their mortgage interest rates by more than any rate rise from the RBA.
So if the Reserve Bank of Australia sees a rate rise as important, then expect a double whammy from the bank you have your mortgage loan with.
The RBA is widely tipped to lift rates by 0.25 of a percentage point next week, but your bank may ask you to pay more on your home loan, with some saying they will up rates by a total of 0.4%. [Mr Mortgage disagrees with this view by the way.]
Ant increase in mortgage rates will hurt mortgage stressed homeowners and put off a lot of home buyers, but the banks don't see this as their problem.
They have been writing heaps of quality loans, and now see this as a time to lock in the good times and not worry about writing new business.
So the big banks can afford to lose a lot of mortgage customers and still make a killing with the their extra margins in place on the remaining mortgage loans.

We have all heard the Banks excuses for increasing mortgage rates.

The banks have complained that the higher costs of funding their loans is squeezing their profit margins.
The banana smoothie story. Remember the Westpac Bank analogy of the banana smoothie vendor?
But Treasurer Wayne Swan has attacked any banks thinking of double dipping, saying they have reported solid profits. Mr Mortgage says they have all made record profits, but are addicted to ever increasing profits, so good luck with your plan Wayne.

Although the four big banks' total first-half profit climbed by $1.3 billion this year, they have complained that their profit margins are being squeezed because it costs them more to borrow from overseas than before the financial crisis. This beggars the question, so where did the record profits come from?

The RBA dismisses banks excuse to rise mortgage interest rates

The Reserve Bank of Australia yesterday dismissed the banks' concerns about their operating margins, saying they have shown little sign that they are under pressure and the interest rates they charge already have been enough to make up for the higher costs they pay for overseas funds.

Why your bank will raise its mortgage rates higher than the official cash rate increase

Your bank will raise its mortgage loan interest rates higher than the RBA increase simply because the big four banks simply have no effective competition.

The non bank mortgage lenders were all but wiped out in the wake of the Global financial crisis. This is the reason we are now paying higher mortgage rates than we should be.

Until the Government gets serious about a Government sponsored mortgage industry, initially for first home owners building new homes, then we will continue to have the banks ripping us off  with higher mortgage rates and be perpetually seeing house prices rise due to housing shortages.

Author: Mr Mortgage

Australia's Mortgage rates to stay on hold? IMF says it should!

IMF say to Reserve Bank of Australia leave interest rates till European debt situation is clear.

Mr Mortgage has been saying for months that interest rates should not rise till after the new year when the World Economy has played out [amongst many other reasons]. This last fewweeks everyone and his dog has been saying rates will rise in October. We have been asking why should rates rise at all this year?
Countless other so-called experts, as reported in all the media, have been saying a rise is on for October. Many Bank economists have switched to the October rate rise will happen theory.
With the financial markets now betting on a mortgage rise, and all  the big banks trying to talk up a rate rise because they will make a killing on the currency markets, the pressure is on the RBA. When rates do rise the Big banks can then slip in their own mortgage rate rises on top of the RBA's  and hope their customers don't notice. But there are too many families in Australia that will suffer mortgage stress if rates do Increase.
The major banks are using mortgage interest rates as milking cows for record profits.

This is the biggest beat up I have seen since the Iraq War WMD.

Why the RBA will leave official rates on hold.

1. European Debt crisis should hold off interest rates raises till into next year.
2. The RBA enjoy second guessing the financial markets who seek to profit on their decisions. They are Independent and like to remind the markets of this.

The IMF agrees with Mr Mortgage on the absence of reason to raise rates.

Well the IMF now agrees with Mr Mortgage, and says a bust may be closer than anyone expects, with a risk that the sovereign debt crisis in Europe may again throw world financial markets into turmoil. This is the second recession that many having been saying could happen. In other words, the US recovery is a "dead cat bounce".Where is the job growth, the housing market recovery, and the shoppers in the US picture? Was the US stimulus too small to work? And will the US Fed go negative with Interest rates? And if they do will the $AU dollar be overpriced?

IMF advises RBA to hold off on lifting Mortgage rates

The IMF advised the Reserve Bank of Australia to hold off lifting interest rates. "The Reserve Bank has scope to wait for the outlook to become clearer," the fund said. There is no impending disaster to happen if it leaves rates as is.
The RBA board is meeting next Tuesday and was widely  tipped to increase rates from the current 4.5 per cent to 4.75%.
But as many people know, the Reserve Bank of Australia's Governor and Board likes to foil currency gamblers who try to second guess Board decisions. The RBAwins when currency traders lose.
In any case a resulting higher dollar is bad for Australia in many ways, as it hurts exporters, farmers and tourism in Australia.
Expect to see the dollar crash in value in the coming days, as the bets on an interest rate rise are switched.
Author: Mr Mortgage

Mortgages. Why people are dissatisfied with the banks, and why the banks don't care..

Mortgage rates may rise above any official cash rate increase, according to many banks. The Government does like it, customers don't like, but the banks don't care. They have us "by the short and curly's."

You may have read the recent report by Choice that the big banks in Australia are on the nose with their customers.

People like the fact that we have a stable banking and financial system, and that their banks have been the rock in the global financial crisis.

But I guess its something that Australians expect from their banks.

The thing that gets under our skin is that Australia's Banks are the most profitable in the World, and while we can't deny they are well run, the real reason for this is the lack of mortgage competition that Banks face in Australia.

And that will lead to the banks taking their customers for granted. And in my opinion they do just that.

The fees and charges that they have been charging us for the last ten years or so, have in fact been in my view unlawful.

But we have let them get away with it, so they get on adding them.

Building societies and credit unions on the other hand are well liked by their customers.

They treat their customers as if they owned the business, and they do. Once you have an account with a building society or credit union, you become a joint owner of that organisation.

Banks do have mission statements that make their customers 'stakeholders'. This however is often meaningless when the share prices take a hit, and the the top officers of the banks get rewarded when share prices rise. And the easiest way to do that is to make more profit on every customer.

What we need to do is to tell the banks when we are not happy, and if you are not heard, then to move your account.

More competition in the Mortgage space is required.

The Treasurer Wayne Swan has been sniping at the banks about mortgage rates, and trying to hold them to official rate rises only.

But customers making a stand and competition are the key to lower mortgage rates.

You probably didn't notice, but Australia's mortgage brokers and securitised mortgage lenders have become largely irrelevant leading up to, and during the Global Financial Crisis. They just couldn't rise the funding to remain competitive with the banks.

Wayne Swan is trying to support the securitised mortgage lenders and has just pledged a further $8 billion dollars for mortgage funding. But that is just a drop in the bucket.

We need to understand that more is required.

Mortgage competition has collapsed in Australia

Mortgage brokers have gone from 40% share to 20% share of the mortgage market, and worse, mortgage originators have fallen from around 25% to just 2.5% of the mortgage business in recent times, and that is the issue.

There is no reason for banks to worry over the next two or three years. The competition has been vanquished and there is no one on the horizon to challenge them.

So what will you do about it? Get your bank to reduce your fees, move to a building society or credit union, get your loan refinanced by a mortgage originator, or just cop it sweet?

ANZ leads the charge of the bank brigade in mortgage interest rate increase

Was it their turn to go first? No one is saying, but the ANZ lead the other three major banks in increasing their variable mortgage home loan rates by a quarter of a percent after the Reserve Bank raised the cash rate by a similar amount.

ANZ was the first of the major banks to move in late morning, the National Australia Bank following by mid afternoon, and the Commonwealth Bank and Westpac by days end.

All four banks are raising their variable mortgage home loan rate by the same amount of the official rate rise of quarter of one percent, that was announced by the RBA this week.

These same banks had recently stated that they will raise rates even without RBA official increases so I guess we should be grateful the rises were not higher.

In my view we need more competition in the Australian mortgage market. But instead we have less as most of the big non bank mortgage lenders are being gobbled up by the banks in the wake of Global Financial Crisis.

Author: Rick Adlam, Mr Mortgage

Australians suffer relative interest rates rise as Australian Banks siphon off the cream for themselves.

It's an Australian pastime to bag the banks I know, but they deserve a special mention for their conduct over the past few interest rate drops where they have sought to siphon off rate cuts meant for customers for their own profit margins.
Yes, they are able to pass on the full rate cuts. They can't be trusted and should not be placed in a position where they can decide not to pass on rate cuts if they choose not to.
The problem is twofold.
Firstly they are answerable to no one. Where's this regulation they talk about?
Secondly that they don't have the competition they used to because:

• Second tier lenders can't get the same rates they enjoy due to drops in State Credit ratings, and thus regional lenders ratings.
• Many of their competitors in the securitised mortgage market can't get funds like they used to.

What Australia needs is a Government sponsored mortgage manager such as Freddie Mac and Fannie Mae in the US so that they can get Government backed funds at competitive rates so that competitive funds can be controlled by the Government and a healthy regulated Mortgage broking industry.

This would produce more jobs and make the construction industry less uncertain and give Australians a better deal to buy their own home.

The Four Major Banks have had to too good for too long. Its time to cut the fat.

Reserve Bank of Australia flags end to mortgage rate cuts and forecasts slower growth

The Reserve Bank of Australia has flagged the likely end of big interest rate cuts, with some economists betting it may hold back on further reductions for several months.
And financial markets scaled back expectations today on the depth of future interest rate cuts after the RBA released its quarterly statement on monetary policy.
A Credit Suisse report said financial markets now priced a total of 50 basis points in further rate reductions over the next 12 months, down from 68 points yesterday.
Macquarie Bank interest rates strategist Rory Robertson said he expected the RBA to “sit on its hands” at the next two meetings while it assesses the impact of the past five rate cuts and the federal Government’s $42 billion stimulus package.
“After having delivered an appropriately aggressive response to the post-Lehman Brothers collapse in global growth prospects, the RBA now can make a respectable case to wait and watch for a while,” said Mr Robertson.
“It’s certainly possible that rates will go to 2 per cent, but it will take longer to get there than three months.”
The central bank earlier this week slashed rates by 100 basis points to a 45-year low of 3.25 per cent, taking total rate cuts to 400 points since September, when the collapse of Lehman Brothers froze global credit markets and smashed equity markets.
In its statement today, the RBA said significant fiscal and monetary stimulus was now pumping through the veins of the crisis-weary economy.
Investors interpreted the statement as signally a more cautious approach to future easings in monetary policy, sending three-year bond futures down 15 points to 96.69 by late afternoon.
Australia's Central Bank also sharply lowered its forecasts for economic growth in coming years, implying that the economy was still at risk of joining major countries in recession before starting to pick up in late 2009.
The RBA expects year-on-year growth of 0.25 per cent in 2008-09, before improving somewhat in 2009-10 with growth of 1.25 per cent. The economy grew by around 1.9 per cent in the third quarter of 2008 from a year earlier.
The non-farm economy will post zero year-on-year growth in the June quarter this year before recovering to expand by 1.25 per cent on year in the middle of 2010, the central bank forecast.
“While the international situation is likely to remain difficult for some time, the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad,” the RBA said.
Mr Robertson said: “The bank has moved so far, so fast that its head is spinning and it’s time to sit back and assess the situation.
“The point of moving more gradually from here would be to ensure that the policy rate is properly calibrated to Australia’s economic prospects, not to the bleaker outlooks for the US, UK, Japanese and Euro-zone economies.”
NAB Capital senior economist David de Garis said he expected the RBA to cut rates by 75 basis points in March and then wait until the September quarter to cut rates by another 50 basis points.

There’s a time that central banks have to stand back and take a deep breath,

said Mr de Garis.
CommSec economist Savanth Sebastian said he expected the RBA to cut the cash rate by another 50-75 basis points over the next two months.
“More than likely the Reserve Bank will follow a similar pattern to that noted by the European Central Bank and keep rates on hold in March, assess all the incoming data before cutting rates once again in April,” said Mr Sebastian.
The RBA's growth forecast for the near term is slightly more pessimistic than the Rudd Government, which earlier this week forecast the economy would grow by 1.0 per cent in 2008-09, before slowing to 0.75 per cent in 2009-10.
The central bank forecast 2008-09 growth of just 0.75 per cent.
Late yesterday, Treasury Secretary Ken Henry, who is also a member of the RBA's policy making board, told a parliamentary committee that the Government's forecasts for economic growth were based on an assumption that rates will be cut further.
The impact of the intensified slowdown in the world economy in recent months and the economic stimulus being put in place would result in the downturn and recovery being more V-shaped, according to the RBA's latest forecasts.
Deeper troughs in growth will be followed by strong growth of 3.25 per cent on year by mid-2011. Previously the RBA had forecast the economy would be growing at 3.0 per cent by mid-2011.
Substantial stimulus has also flowed to the Australian economy in recent months as a result of a sharp decline in the Australian dollar.
The currency came close to parity with the US dollar in mid-2008, before plunging to just above US60 cents late last year and then recovering to around US65c currently. In trade weighted terms, the Australian dollar is 20 per cent below its level a year ago.
The RBA also revised its forecasts for inflation, predicting annual rises in the consumer price index would fall back to within the central bank's 2-to-3 per cent target band by mid-2009. Previously it had forecast the CPI would not be safely tucked within the band until mid-2011.
Despite expectations of an eventual growth recovery, the RBA expects the jobless rate will rise further. "With job vacancies and hiring intentions falling and short-term economic prospects subdued, more significant rises in unemployment are likely in the period ahead," the RBA said.
Some improvement in the house construction sector can be expected after a sharp downturn in 2008. Significantly lower interest rates and direct financial assistance for new home buyers by the government were now showing signs of adding to housing demand, it said.
Consumer confidence remained battered, but some recovery can be expected as the government spending measures and lower interest rates add "further to household incomes in the March and June quarters this year", the central bank said.
Also insulating Australia from the full heat of the global economic downturn was a strong financial sector, which has allowed a substantial amount of monetary policy easing to be passed through to consumers and more so than in many other countries, it said.
Still, the RBA is keeping close watch on business investment, warning investment intentions are being significantly wound back as some companies experience difficulty in obtaining credit.
Business confidence deteriorated sharply in October and November but this "has been partially reversed in December and January," the central bank said.
Against a backdrop of rising unemployment and weakening economic growth, the RBA would be under pressure to continue cutting interest rates for at least the next year or two, said Mr Robertson.

Mortgage Brokers and your mortgage are in for a hell of a ride in 2008

When it comes to mortgage rates, 2008 may be remembered as the year the market went haywire.
Near the start of the year, some long-term mortgages were around 6 percent, but by July the average rate approached 7 percent. In October, rates jumped by half a percentage point during one seven-day period, then dropped by the same amount the next week, only to surge again a week later.
"We thought the refinancing boom of the late '80s was a wild time," said Sharon Heitman, the owner of the Heitman Group, a mortgage consulting firm. "But I've truly not seen anything like this."
In years past, Heitman noted, mortgage rates followed fairly predictable trends. They would generally increase toward the end of a year, then hold steady through midwinter. By late February or early March, they would head lower and remain in a range until late fall.
But those patterns seemed to change about six years ago, she said, as lenders began aggressively packaging loans as investment securities. While that may have added financing sources, it also caused volatility.
The credit crunch and financial crisis have dried up the market for mortgage-backed securities, leaving many lenders with little or no money for borrowers.
Interest rate swings, meanwhile, grew more pronounced as Fannie Mae and Freddie Mac, the government agencies that buy mortgages from lenders, began increasing the fees they charge to help shore up their own finances.
Rates on 30-year fixed-rate mortgages, the most commonly held home loans, opened 2008 at 6.07 percent, with some lenders offering rates even lower, according to Freddie Mac. In the Northeast, rates were hovering slightly higher, at 6.14 percent.
By late December, the national average had dropped to roughly 5.1 percent, with some lenders offering rates just below 5 percent.
In many weeks in between, there was a huge spread.
Heitman, who receives interest-rate data daily from mortgage lenders, said that in years past the highest and lowest rates on a given day might have been separated by about a tenth of a percentage point. If a lender reported an interest rate significantly higher than the prevailing market rate, she said, she would call the company. "And it was usually an error," she added.
In recent months, however, the spread stretched to half a percentage point on some days. The higher rates reflected some lenders' concerns about whether borrowers would be able to repay their loans in a souring economy, or whether banks could resell the loans to investors anytime soon.
For borrowers, though, 2008 highlighted the importance of shopping around - a habit that mortgage industry executives say is still not practiced widely enough.
Because a mortgage broker typically sells loans on behalf of perhaps 10 lenders, at most, a borrower could be offered a range of loans that does not include the market's lowest.
Loan officers working at banks can sometimes offer other lenders' products, but they typically give borrowers fewer loan options than brokers.
This is not to say that borrowers can afford simply to skip banks in favor of brokers - last year, local banks offered some of the lowest mortgage rates on the market.
Borrowers might simply do well to exercise considerable patience while shopping around, and hope that the mortgage roller coaster slows down in 2009.

More mortgage pain ahead following credit issues in the US

The CBA says mortgage rates to rise even if no RBA rise Non-bank lenders' rates likely to rise the most Australian stocks slumped almost 3% last week.
The nation's biggest home lender has warned that home-owners' mortgage rates will rise as the fallout from the US housing crisis continues to spread through global financial markets.
As the Australian stock market suffered another $48 billion plunge in value yesterday - taking its losses in the past three weeks to almost 10 per cent - Commonwealth Bank chief executive Ralph Norris said mortgage rates were likely to rise even if the Reserve Bank did not lift official rates.
Non-bank lenders most affected
Mr Norris said non-bank lenders - companies such as Bluestone, Wizard and Aussie Home Loans - would be more significantly affected by the credit crunch triggered by the crisis among poor-quality sub-prime home loans in the US.
He said the Commonwealth had no plans to lift rates, "but the market is driven by supply and demand, and if funding costs increase significantly, then we pass that on".
"The fact of the matter is the price of credit in the market internationally has moved, so there will at some stage be some increase in rates," he said.
"In regard to the level of those increases, non-bank lenders are going to be in a situation where they're going to have to pass on significantly greater increases than a bank like us."
Bluestone rates already raised above RBA rate
The Australian reported this week that Bluestone, hit by the higher cost of borrowing money to on-lend to its customers, had been forced to raise mortgage rates by 17-55 basis points.
Other lenders, particularly those offering low-documentation loans to customers with poor credit histories, are also likely to pass on the higher costs.
Aussie Home Loans' John Symond has warned rates will rise by about 0.25 percentage points.
And Mr Norris warned home-owners that he expected official interest rates to rise further after the Reserve Bank's increase of 0.25 percentage points last week to 6.5 per cent.
The sub-prime crisis continues to hurt international stock markets, with the Australian market, which took its lead from a falling Wall St, slumping almost 3 per cent yesterday.
The benchmark S&P/ASX 200 index, which yesterday fell 176.8 points to 5788 points, is down 9.9 per cent - just shy of the technical correction point of 10 per cent - since its record high of 6422.3 on July 24.
Aussie stock market falls
The Australian stock market, bolstered by the strength of its resources stocks, has in recent months been able to avoid following the big falls on Wall St.
But the Dow Jones Industrial Average is down just 7 per cent since the sub-prime crisis first broke three weeks ago, and in the past two trading sessions, the Australian stock market has suffered bigger falls than its New York counterpart.
Failures by mortgage lenders in the US, most of which were dealing in the riskier end of the housing market, have kept the US share market on tenterhooks for close to a month, and every day that provides a new financial hardship story pushes that market down further.
Investors in Australia's worst-affected hedge fund, Basis Capital's Yield Fund, were told yesterday by the fund's Sydney-based manager that they were now likely to lose more than 80 per cent of their money because of the sub-prime meltdown. Source: The Australian

Mortgage rate increase more likely due to consumer price rises

A Mortgage interest rate rise next week is looking all the more certain after consumer prices rose at their fastest pace in almost a year, possibly due in part to the government's tax cuts.
The TD Securities-Melbourne Institute monthly inflation gauge, which indicates the likely pace of official inflation, rose 0.6 per cent in July to its highest rate since August 2006.
The result followed an increase of 0.2 per cent in June and took the annual pace of inflation to 3 per cent - at the top of the Reserve Bank of Australia's (RBA) annual inflation target of 2 to 3 per cent.
Core inflation also was higher, with the measure excluding volatile items rising 0.7 per cent in July for an annual pace of 3.8 per cent.
TD Securities senior strategist Joshua Williamson said the rise in consumer prices coincided with the government's latest tax cuts, which started on July 1.
"There is some suspicion that prices were pushed higher as firms took advantage of more favourable consumer finances," Mr Williamson said.
He said the acceleration in inflation in July should lock in an interest rate rise on Wednesday. Most economists expect interest rates to rise 25 basis points to 6.50 per cent.
"The RBA has kept interest rates on hold so far in 2007, but with economic growth strong and the labour market tight, the inflation pick up needs to be nipped in the bud for the inflation credibility of the RBA to be maintained," Mr Williamson said.
"Any further acceleration in inflation in the months ahead would increase the risk of yet a further rate rise in late 2007."
Consumer prices rose in a record 45 expenditure classes, fell in 10 classes and remained unchanged in 35 for a net balance of 35 price rises in July, the inflation gauge showed.
The biggest contributors to inflation during the month were increases in the prices of fruit and vegetables, bread and cereal products, and alcohol and tobacco.
The rises were partially offset by falls in the prices of automotive fuel, telecommunications, and audio, visual and computing equipment.
The July inflation gauge follows a stronger than expected rise in official inflation in the June quarter.
Source: AAP

Residentail land developer says mortgage rate increase will not affect sales

Australian residential land developer Australand Property Group Ltd says a mortgage interest rate rise in August would have little impact on its business, as the company had avoided projects likely to be affected by such a change.
Australand reported a 34 per cent lift in first half profit, saying it is on track to record an improvement in annual earnings.
The diversified property group made a net profit of $119.596 million for the first six months of calendar 2007, up from $89.256 million in the same period last year.
The result was mainly driven by strong performances in its commercial, industrial property and investment property divisions.
However, the residential development business did record a small increase in pre-tax earnings, as it weathered mixed fortunes in housing markets across Australia.
The residential division's pre-tax profit rose five per cent to $34.3 million.
Asked if a rate rise later this year would affect the company, acting chief executive John Thomas said Australand had shielded itself against such an increase, in particular, by distancing itself from the first-home buyer market.
A rise of 25 basis points to 6.50 per cent has been predicted by many economists after last week's surprisingly strong inflation figures.
"From Australand's perspective, the markets that we are focussed on are unlikely to be affected significantly by interest rates," Mr Thomas said.
"The first home owners market is not where our focus has been. Our focus in on ... quality projects with existing underlying demand, fundamentally from the people who still have plenty of money.
"People in Sydney, for instance, in the eastern suburbs, on the North Shore, likely to be less affected by an interest rate rise.
"Interest rates will really have an effect in the longer term on affordability, particularly in the first home owner market, and those markets that are not performing strongly are the ones we've been pretty careful to keep ourselves out of."
Housing affordability, however, remained a concern for the company, said executive general manager residential, Peter Bourke.
"We still have affordability concerns in Perth and in Sydney, where it takes about 39 per cent of a weekly earnings to service a mortgage," he said.
"That is far too high, especially when you're talking Melbourne at about 28 per cent."
Mr Bourke attributed the affordability problems and spiralling rents in part to a lack of apartment construction, particularly in NSW.
"We have got a lack of apartment construction and some land constraints, and that is adding pressure on the demand supply relationship," he said.
"Apartment construction in the eastern states has basically stalled."
At 1218 AEST, Australand securities had fallen three cents to $2.27.
Source: AAP

August rate hike tipped due to increased inflation and housing sales increases

Mortagge rates could be on the way up again as soon as August, presenting Prime Minister John Howard with fresh political problems as housing affordability takes a tumble.
New inflation figures released yesterday came in at a higher than expected 1.2 per cent for the June quarter, sparking fears of an imminent rise. Annual inflation sits at 2.1 per cent, which is toward the bottom of the Reserve Bank's target range.
But the size of the increase - caused mainly by higher petrol and food prices, as well as rising rents - was likely to concern the bank's board.
Most economists agreed the price volatility would prompt a rates rise at the RBA's August meeting.
Mr Howard, who today celebrates his 68th birthday, suggested there was no need for an increase.
"What I'm saying to you and what is obvious is that it (inflation) is still well within that range,'' he said.
Home Buyer affordability to decline
A quarter of a percentage rise would push up the monthly loan repayment on a $300,000 mortgage by $50.
The increase would also be expected to flow through to the rental market .
Shadow treasurer Wayne Swan seized on the new inflation figures to warn householders were under growing financial pressure and the future was looking bleak.
"Apart from the possible implications for interest rates, mums and dads around the country will be concerned that the cost of the basics are going up and up,'' Mr Swan said.
The new inflation figures show in the three months to the end of June petrol prices rose 9 per cent, vegetables 6 per cent, rent 1.6 per cent while the cost of travel and computers fell.
The broad inflation rate of 1.2 per cent for the June quarter, and the core rate of 0.9 per cent, was well beyond market predictions.
Pain in the mortgage belt.
A rate hike could not come at a worse time for the Government as it struggles to peg back Labor's runaway lead in the polls.
Labor has made political capital out of declining affordability, including in the private rental market, and from the increasing cost of living.
Rental prices increased across all capital cities by 1.6 per cent, driven by continuing low vacancy rates.
Renewed speculation of an imminent interest rates rise dovetails conveniently with Opposition Leader Kevin Rudd's housing summit in Canberra today.
Labor remained tight-lipped yesterday on the possible outcomes of the meeting, which it says will examine the factors leading to higher prices and a lack of affordable rental housing.
Call to slash stamp duty
Treasurer Peter Costello called on the states to cut stamp duties on homes and release more land.
"Young homebuyers are paying more (stamp duty) than ever before . . . I expect an agreement to come out tomorrow from the Labor states to cut stamp duty,'' Mr Costello said.
Source: The Advertiser and The Courier-Mail

Will Australia's rampant economy raise mortgage interest rates?

The pace of economic activity in Australia has picked up in March, with interest rates likely to rise next year, says Westpac.
The Westpac-Melbourne Institute leading index of economic activity, which indicates the likely pace of activity three to nine months in the future, was 4.4 per cent, and above its long-term trend of 4 per cent.
The annualised growth rate of the coincident index was 5.7 per cent, which was well above its long-term trend of 3.6 per cent.
Economy to gain strengthWestpac senior economist Andrew Hanlan said the outcome pointed to a positive economic outlook.
"We saw the Australian economy gather momentum late in 2006 and into early 2007," he said.
"Non-farm GDP strengthened in the December quarter and year-ended growth was a healthy 3.5 per cent.
"A significant lift in consumer spending also suggests the economy has accelerated."
Mr Hanlan said real retail sales over the last two quarters were up 6 per cent annualised, the strongest pace since the housing boom of 2003-04.
"In our view the Leading Index suggests that this new found momentum in the Australian economy is likely to be sustained throughout 2007."
Rates set to rise The international economy continues to provide a significant stimulus to our economy, Mr Hanlan said.
"The risk is that inflation pressures re-emerge with the labour market to tighten further and the housing sector to move into recovery mode," he said.
Mr Hanlan said the inflationary pressures would most likely lead to an interest-rate rise in Australia in the first half of 2008. The central bank raised interest rates three times in 2006.Westpac said that although global economic expansion was set to continue, the pace at which many economies grow was likely to slow over the coming months.
Source: AAP