Interest rate hikes to hit hard in a year's time

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The real bite into homeowners’ pockets as a result of the Reserve Bank raising interest rates won’t hit until up to about 18 months, says ANZ Bank economist Cameron Bagrie.

Wednesday, September 22nd 2004, 8:44PM

by Jenny Ruth

The reason for that is that about 70% of home lending is now done at fixed rates and that 80% of fixed-rate lending is for terms less than two years. Bagrie says current Reserve Bank data suggests the average interest rate on existing one to two-year fixed rate loans is only 6.9%.

That compares with the 8.5% to 8.6% floating rates currently charged by the five major home lending banks.

That means most borrowers haven’t experienced any increase in rates yet.

The Reserve Bank has raised its official cash rate (OCR) five times this year from 5% to 6.25% and economists are expecting a further increase at the next review in late October.

Bagrie says most borrowers rolling over a fixed-rate loan now will be paying up to about 75 basis points more in interest but that by next year they will be faced with 100 point or more increases.

"If the Reserve Bank keeps on tightening and we see a sell-off in global rates, those (one-year) rates are going to be up around 8%," he says.

If the Reserve Bank raises the OCR to as much as 6.75% and there’s an aggressive sell-off in global rates, that could mean somebody with a $100,000 mortgage will end up having to pay $1,000 more a year in mortgage interest.

While the Reserve Bank will be aware of this situation, it seems to be more concerned about existing capacity constraints and inflation pressures rather than what will happen in the medium term, he says.

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