The Reserve Bank of Australia has left interest rates on hold at 2.5% at its October meeting, which marks 14 months since the last rate cut and almost 4 years since the last rate increase.
Laine Lister spoke to Peter Arnold, product director of RateCity.com.au, about what the decision means for consumers.
Q: So Pete, another month with interest rates on hold at record lows. How much has changed in the home loan space since August 2013, when the last rate move was.
We’ve seen a lot of change since the last rate move was, we’ve seen variable rates trimmed just a little bit, but a lot of action in the fixed-rate space. We’ve seen all fixed rates come off slightly and a lot of action in the 5-year space where the long term rates have come down quite significantly – about half a percentage point for 5-year fixed.
Q: Recent research has shown that Australians have the highest housing debt-to-income ratio on record. Are borrowers overstretching?
It appears there are borrowers out there who are willing to take on big amount of household debt. We don’t think overall there is massive stretching, but there has been a lot of growth in the last year – 6.7% annualised housing credit growth and there is certainly indications that the property market is on the boil. So people do need to be cautious about how much they take on in this low interest rate environment and prepare for the future.
Q: At the moment, interest rates are at record lows, but it’s likely that they will increase and the historical average interest rate is around the 7% mark. So if rates did go back up, it would be a bit of a shock for variable borrowers.
That’s right, Laine. Variable rates are very low now. But it’s really when, not if, rates will go up. We’re likely to it return to historical highs or at least historical averages around 7% so borrowers need to plan now to get that buffer of 2-3% at least – that’s around $300 per month as a bare minimum they should be preparing for on an average loan and get preparing for those higher rates in coming years.
The good news is that RBA data suggests that many household are doing this, but for those on the margins who are borrowing up big, who aren’t paying down their loans amounts, be careful. Make sure you’re being realistic about the future.
Q: There has been a lot of noise recently around tighter lending rules with the Reserve Bank of Australia meeting with a Senate committee last week. But Pete, do you think banks will start tightening up lending rules on their own?
We have seen a couple of lenders tightening up their LVR rules. So LVR being the amount someone can borrow relative to the value of their house. Se we’ve seen a few tighten that up meaning many people need bigger deposits. I think we will see a bit more of it. New Zealand banks have had their hand forced and they’ve been regulated to have lower LVRs – meaning bigger deposits as mandatory.
Regardless of what happens with banks and regulations, really it’s up to consumers to decide how much they can borrow. Don’t take the banks’ word for it, do your own sums and don’t borrow too much.
OK Pete, thanks so much for your time today and as we’ve said interest rates on hold at 2.5% again in October and we’ll check in again next month for another RBA wrap.