Rise in US interest rates would negatively impact Australia’s mortgage belt

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The US Federal Reserve is scheduled to convene this week, with the lion’s share of economists predicting that the Fed will increase interest rates.

If they do it will be only the third time they have lifted rates in a decade, following the GFC, which began in 2007.

With markets pricing in two further rises before Christmas, it’s possible that by year’s end, Australian banks will be paying around 0.75 percentage points more for each dollar they borrow short-term from abroad.

This increase in borrowing costs for lenders will place an additional burden on the Australian economy and will likely inflate mortgage rates.

Bank debt passed on to Aussie consumers

Australia’s national debt rose above $1trn for the first time last year, and the country now has the unenviable reputation of boasting second-highest household debt in the world.

A substantial increase in mortgage costs would hit hard, particularly for those living in mortgage belt suburbs, where disposable incomes are tight.

Renters with only minor personal debts will not feel much of an impact, and in fact, record numbers of new rental dwellings coming onto the market nationwide might serve to lower asking rents, thereby taking some pressure off their budgets.

Older Aussies who have paid off their homes could potentially benefit from US rate rises; as wholesale funding costs increase, the banks will pay more to raise local deposits, which means returns from high-interest savings accounts will improve.

But in-between the one third of households who rent and the one third who’ve paid off their mortgages is the so-called mortgage belt. Rate rises would eat into the budgets and drain the hard-earned incomes of households that fall under this category.

Mortgage holders would be hit with an expensive increase: on a $500,000 mortgage, an increase of 0.75% equates to $3,750 per year in interest, or $312 per month.

 

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