Why Australia’s credit rating matters for your home loan
A common dilemma for many Australians is whether to go for a fixed or variable home loan rate. While context is everything, right now, amidst the Australia’s credit rating outlook the fixed option is looking more and more attractive.
Why do I say this?
Well, it all comes down to simple economics, and where Australia sits on the world stage. While we have had 26 years of uninterrupted economic growth, we are still in danger of losing our coveted AAA credit rating.
If this happens the flow on effect to homeowners and prospective home buyers could be catastrophic – mortgage rates would increase and lending will slow.
Yesterday Shadow Treasurer Chris Bowen addressed the National Press Club in Canberra and laid it all out in stark detail.
“The loss of our AAA credit rating and downgrades to our banks would ricochet through the economy through higher mortgage costs for households and businesses at precisely the wrong time,” Mr Bowen said.
“This is not to mention the impact a downgrade would have on confidence in the community.”
If Australia was to get a downgrade this may mean a steepening longer run yield curve resulting in the cost of funding for banks to rise – placing pressure on interest rates.
It also means that when our banks go offshore to raise money, they will be competing with a higher number of AA-rated countries.
But what does this all mean for you — Australia’s homeowners?
Well, for thing one thing, we may see more expensive mortgages.
According to Mr Bowen, even a small 20-basis-point increase to the average mortgage holder could see them paying $720 more a year in interest payments.
And I like, the Shadow Treasurer, believe that we will see a steady increase in mortgage rates in 2017 as banks face stiffer competition globally. This would have a flow on effect to property prices and we could see a slowing in growth.
If you have concerns about this happening this could be a good time to fix loans and there is a distinct possibility we may see banks stop or reduce their lending to high Loan to Value Ratios (LVRs)
While the prognosis for our economy remains unclear and the average home price remains stuck at 12 times the average salary, you can control the type of mortgage you take out. With such headwinds ahead – consider fixed rates as a way to protect yourself.
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The information in this article contains general information and does not take into account your personal objectives, financial situation or needs. We recommend that you consult a licensed or authorised financial adviser if you require financial advice that takes into account your personal circumstances.