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Tougher lending standards could push rates higher

Mortgage holders have been warned they could face unexpected interest rate rises within months in a development that would hurt the national economy.

Analysts believe a tightening of lending standards across the banking sector could translate into up to a half percentage point lift in mortgage rates or the banks failing to pass on in full any future Reserve Bank rate cuts.

Official interest rates are at their lowest level on record, translating into mortgage rates of 5 per cent or lower. Markets are pricing in even further cuts in official rates to boost the economy.

But 1300HomeLoan managing director John Kolenda said the banks were under pressure to meet new Australian Prudential Regulation Authority guidelines by the middle of next year.

That would translate into pain for mortgage holders, via unexpected increases in rates or a clawback by the banks of any reduction in official interest rates.

“The decision of many lenders to raise interest rates for investment and interest-only loans as well as revised borrowing conditions has already had an impact on many borrowers with more expected,” he said.

“We are likely to see increases from 25 to 50 basis points in out-of-cycle movements by many banks as they adjust their pricing to accommodate additional costs.”

Mr Kolenda said thousands of borrowers had seen their mortgage rates increase by up to 49 basis points over recent months.

All of the major banks have lifted some of their investor mortgage interest rates over recent months in response to demands from regulators for tighter lending conditions.

His comments came as a senior member of the Reserve Bank questioned concerns that ongoing low interest rates were feeding into a future economic trouble.

John Simon, the RBA’s head of economic research, said current low rates were entirely appropriate for current economic conditions and downplayed claims that low rates were sowing the seeds for a repeat of the Global Finanical Crisis.

“So, while it never pays to be complacent, there are few early-warning indicators for a financial crisis despite the prevalence of low nominal interest rates,” he said.

“In any case, low interest rates are a poor indicator of future problems and, given currently weak global growth, entirely appropriate.”

Article source:

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