The US Federal Reserve’s decision to lift interest rates by 25 basis points will have knock-on effects for Australian mortgage holders, according to a credit union CEO.
Gateway Credit Union’s chief executive Paul Thomas says Australian borrowers “will not escape unscathed” from the Fed’s move on interest rates.
The US central bank lifted the country’s interest rate by 25 basis points to a range of 0.75 per cent to 1.00 per cent earlier this week.
“The bond markets that determine global rates generally follow the US Fed, and with Australian banks getting around 40 per cent of their funding from overseas, Aussie borrowers should brace themselves for interest rate increases too,” Mr Thomas said.
He said Australia’s period of low domestic rates will soon be coming to an end.
“Although borrowers have been enjoying a low-rate environment for some time, they need to take heed and make sure they will be able to sustain their loans when rates begin to rise again,” Mr Thomas said.
“With household debt at an all-time high, any interest rate increase can significantly impact mortgage holders.”
Mr Thomas’ comments come after BIS Oxford Economics managing director Kim Hawtrey suggested that ‘Trumpflation’ could lead to mortgage stress for Australia.
Speaking at the BIS Oxford Economics forecasting conference in Sydney last week, Mr Hawtrey highlighted the fact that Australia’s household debt to income ratio is higher than the US, Canada and the eurozone.
Mr Hawtrey said interest-only loans – which account for about 40 per cent of Australia’s mortgages – would “go underwater” if house prices were to decline.
“The election of Donald Trump is likely to see higher interest rates in the US and the world economy. Higher inflation is also likely due to ‘Trumpanomics’ and ‘Trumpflation’ is almost certain to mean that interest rates around the world, after eight years after the GFC of being subnormal, are now going to normalise,” he said.
“Australia will eventually need to fall into line with that, and given the size of our loans in this boom, to have underwritten this boom, it’s going to see an increase in mortgage stress.”