Another interest rate hike less likely - for now

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The sub-prime mortgage crisis in the US shouldn't cripple Aussie homeowners, as some doom-mongers have been predicting - although homeowners should be prepared for more expensive loans across the board.

Many institutions have been burnt with heavy losses because they put money into high-risk, high-yielding investment vehicles, such as hedge funds, which created returns by providing capital to US lenders who have behaved irresponsibly.

The resultant freeze on credit in the American capital markets has meant that Australian lenders are having difficulty financing their loans with the cheap money they were able to access before the crisis and have to increase the interest rates on home loans to cover the extra cost.

Credit crisis: the effect on interest rates
Economists are being pretty cagey about making predictions about interest rates following this global credit crisis, but the general consensus seems to be that recent events may make another rate rise less likely.

The Reserve Bank of Australia will wait to see what the fallout is before making any more moves up or down. This could be seen as good news for homeowners, as there was the possibility of another quarter percentage point rise this year, or certainly early next year if inflation didn't fall as required.

Paul Braddick, head of financial systems analysis at ANZ Bank, said it's still an open question as to whether higher mortgage rates at the banks will affect inflation and translate into a drop in the cash rate.

Shane Oliver, head of Investment Strategy and chief economist at AMP Capital Investors, said rates may be cut as a consequence of the sub-prime crisis.
"Our assessment remains that the current problems in financial markets and the risks they pose to the Australian economic outlook - via an increase in the cost of credit locally and a reduction in its supply and the impact on the US economy - are likely to see interest rates remain on hold for the rest of this year, with a rising possibility that they may have to be cut," said Oliver.

The Commonwealth Bank made a more conservative statement in a recent economic roundup. It said: "We see any cuts by the Fed as 'insurance' against market turmoil spreading further. Beyond the housing market, the US economy is in good shape. The turmoil may delay further increases in official rates in Australia, Europe and the UK, but economic strength and inflation risks in these economies remain, at least until there are clear signs of current financial market volatility inducing slower growth and lower inflation risks in the real economy."

With interest rates at their lowest for more than 50 years, there are some great rates available. The best thing to do is to compare rates from all the lenders. Let us help take the leg work out of doing this - Compare Home Loans now

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