Borrowers warned to brace for across-the-board mortgage rate increases

Despite official interest rates being on hold at an historic low of 1.5 per cent since August 2016, mortgage rates have been rising over that time. Experts say mortgage rates will be hiked even further as a result of the government's proposed levy on the big four banks and Macquarie Bank, to start from July 1.

They are likely to recoup much of the $6 billion the government estimates it will reap over four years, by increasing interest rates on their mortgages and, perhaps, lowering dividends to shareholders.

In a further blow to mortgage borrowers, ratings agency S&P this week downgraded the credit ratings of more than 20 smaller financial institutions, including Bank of Queensland, Bendigo & Adelaide Bank and AMP Bank.

Their ratings were lowered because the risk of a downturn in property would affect these lenders. Ratings for the big banks were unchanged on the assumption that they are too big to fail and the government would step in to provide support if needed.

Price correction

S&P is not expecting a crash in property prices though it says the risk of a sharp correction has increased, but experts are warning borrowers not to take on too much mortgage debt.

Bessie Hassan, money expert at comparison site Finder, says the present low-interest rate setting may entice some people to borrow more than they can comfortably afford.

"These historically low rates are not here to stay forever so don't be blind-sided by the attractive rates on offer," she says. "Make your decision with the expectation that rates will rise – it's not a matter of if, but when."

The downgrades of the ratings of the smaller institutions will increase their costs of funding and likely lead to these lenders also increasing mortgage interest rates, experts say.

However, increases are likely to be less than those of the big banks and their rates should continue to stay below those of the biggest lenders.

"I think that it's highly likely that owner-occupiers will be whacked with another round of hikes in the coming months as the big banks try to plug the shortfall left by the bank levy," says Kirsty Lamont, a director of comparison site Mozo.

"In fact, our calculations indicate that the big banks will need to lift variable mortgage rates across the board by about 0.2 percentage points to recover the cost of the levy."

The big four banks have about 80 per cent of the mortgage market. The market share means that they have price-setting power in the market and will probably be able to get away with increasing rates.

But it is not only rate hikes that borrowers need to be worried about.

Lamont expects the big banks to look at other ways to fill the revenue gap such as jacking up annual fees on home loans and perhaps also increasing interest rates on credit cards and slashing term deposit rates.

Decision to act

Ruchik Modi, a 33-year-old IT applications analyst from Melbourne, had a mortgage with one of the big banks and is now paying almost half-a-percentage point less after switching to a smaller lender.

He and his wife live in Truganina in Melbourne's west. Although the relatively high interest rate he was paying was a big factor, he was also unhappy with the customer service he was receiving from the big bank.

"I had a look on Facebook last year to find a cheaper loan but did not do anything about it. And then I saw this ad to find a mortgage using a broker," he says.

That was through HashChing, an online marketplace that connects borrowers with mortgage brokers that are rated by borrowers.

That was about two months ago. "It was the easiest process," Modi says. "The broker had high ratings and was the reason I contacted him."

Steve Mickenbecker, the group executive of financial services, at comparison site Canstar, says the lowest rates are generally available from the mortgage originators.

These use "wholesale" funding and don't hold loans on their balance sheets. They have not been caught in the credit ratings downgrade. But he still expects these lenders will increase their rates.

Mortgage originators

"I suspect that even these will go a bit north anyway," Mickenbecker says. But their rates will still be relatively low, he says.

"It's obvious that you should shop around and give yourself a rate cut by looking at the alternatives or twist the arm of your existing lender," he says.

"The difference between the highest and lowest prices is something like 2 percentage points," he says.

Lamont says anything under 3.9 per cent is a "very sharp" rate, for both variable rate owner-occupier loans and three-year fixed. About 15 per cent of lenders in the market offer rates less than that.

Mandeep Sodhi, the chief executive of HashChing, says on a $500,000 mortgage, an increase of half a percentage point on the lowest rates now being advertised by the big four banks means at least an extra $141 in monthly mortgage payments.

That is almost $1700 a year. "Quite a hefty fine for staying loyal to your bank," he says.

Alan Kirkland, the chief executive of consumer group, Choice, says one challenge for looking to switch is making sure that you aren't with a sub-brand or product still connected with a big bank.

"The big banks hide behind brands and white-label home loans so you could be with a big institution and not even realise it," Kirkland says.

Co-ops and mutuals

Melina Morrison, chief executive of the Business Council of Co-operatives and Mutuals, is urging borrowers to take a look at the rates on offer from its members. "There is a long list of customer-owned and small banks which offer better value for everyday Australians," Morrison says.

"They have the advantage of being owned by their customers so it's in their interests to do the right thing by them," she says.

These lenders have not been increasing their rates to nearly the same extent as the biggest lenders.

Property prices in Sydney and Melbourne have doubled since 2009, with the price rises accelerating as more investors have came into those markets.

That is why the regulators started imposing limits on how much lending could go to investors.

Though investors have been hit the hardest, those owner-occupiers with interest-only loans also saw interest rates rise as well as other measures, such as lenders requiring bigger deposits.

But in March this year, mortgage rates for owner-occupiers started going up as well.

But in the search for a cheaper mortgage, borrowers must be aware of the costs and fees of switching to another mortgage, says Collins Mayaki, a Sydney mortgage broker at Finsure Finance and Insurance.

"It may not be worth it. It's important to check whether refinancing will actually save you money," Mayaki says.

"Refinancing your home loan is a good decision if the savings on your home loan make good the refinancing costs in a year or so," he says.

Fixed rates

Refinancers could also look at fixed-rate loans. Even though most fixed rates have edged up recently, the gap between the typical fixed rate and typical variable rates has never been wider, says Canstar's Mickenbecker.

"You are fixing at a low level and interest rates are more likely to go up," he says. Borrowers could also have their mortgage split between variable and fixed, he says.

However, some, like HashChing's Sodhi, expect there will be a rate cut by the Reserve Bank by the end of this year. That's because of the out-of-cycle increases in mortgage rates already. Wages growth is subdued, inflation is low and there are some early signs that the property prices in Sydney and Melbourne have peaked.

SMH/ May 28 2017

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