Interest rate increases an eventual risk for borrowers: Fitch warning
Monthly home loan repayments will rise 40% if interest rates return to 2008 highs and banks might not be taking this into account when lending, according to Fitch Ratings.
Monthly repayments on a $300,000 loan would increase from $1820 to $2544, severely reducing borrowers’ ability to meet their mortgage obligations.
Average standard variable interest rates (SVR) provided by large banks are now at 6.1%, with borrowers usually able to get discounts of 0.5 to 1.0 percentage point, according to Fitch Ratings. But SVRs were at 9.6% as recently as September 2008.
The Reserve Bank of Australia recently cut the interest rate for the eighth time since October 2011 to a record low of 2.5%.
“Australia's current low interest rates, coupled with high house prices and high household leverage, could expose borrowers to future payment shocks when interest rates rise,” Fitch Ratings says.
It says banks should be using serviceability tests using SVRs closer to historical averages than they currently do.
Most banks generally use a buffer of 1.5 to 2.0 percentage points higher than the existing rate when calculating serviceability as well as a minimum lending rate, but Fitch Ratings says this might not be enough.
“A minimum lending rate can capture the risk that rates return to average historical levels that are higher than the stress rate with the addition of a buffer.”
“An interest rates rise, together with the projected rise in unemployment, could adversely impact borrowers and residential mortgage vintages originated in a low interest rate environment.”
