RBA wants home buyers to factor in higher rates

Publisher : The Australian, March 26th 2009

THE Reserve Bank says Australia will avoid a US sub-prime mortgage crisis, but wants borrowers to ensure they can afford higher rates.

Tightened lending standards and a significant fall in the number of risky loans written in the past 18 months meant most borrowers would be able to service their loans once interest rates started to rise, said Anthony Richards, the head of the RBA’s economic analysis department.

“No doubt, as at any time, some of the loans being written now will turn sour. However, overall, I suspect that the risk of non-performing loans increasing to the extent seen in the United States is low,” Mr Richards told a housing conference in Sydney today.

“Nevertheless, households that are considering entering into home ownership need to carefully consider their own circumstances, including whether they would be able to continue servicing their loans if mortgage rates were at some point to begin to return to more normal levels.”

The RBA has slashed interest rates by 400 basis points to 3.25 per cent since last September, reducing borrowing costs to the lowest level in 45 years.

Mr Richards said Australian lending standards were never relaxed during the housing boom earlier this decade as much as they were in the United States.

In the US, low-income earners were able to take out mortgages at low “honeymoon” rates that were reset a few years later at much higher rates, leading to many borrowers defaulting on their loans.

“So the question arises whether a period of low interest rates in Australia, combined with the boost in grants to first-home buyers, could lead to an expansion of lending to riskier borrowers who will only be able to afford their mortgages as long as interest rates remain low. I think there are good reasons to think this is not a major risk,” said Mr Richards. Continue Reading…


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