Chances of a December hike by the Fed have hit 96 per cent, though there was no real guidance on what happens next year.
Rising fixed mortgage rates mean it could be time to lock in record low repayments before it is too late, say mortgage specialists and financial analysts.
A rise of just 25 basis points could mean increased interest payments of almost $120 a month for a borrower with an 80 per cent loan-to-value ratio repaying an $800,000 principal and interest mortgage over 30 years, according to Canstar, which monitors interest rates and fees. That’s based on a move from 3.75 per cent to 4 per cent.
Variable rates are unlikely to fall any further, say financial analysts who add that they’re more likely to rise.
“It’s likely we have seen the bottom of the interest rate cycle, or are very close to it,” says Shane Oliver, AMP Capital chief economist, about the direction of interest rates. “So there is a case to lock in fixed rate mortgages when their rates remain ultra low below 4 per cent.”
CBA has abandoned its long-held forecast of another RBA rate cut in the second quarter of 2017.
Chief economist Michael Blythe now sees rates on hold over 2017, whilst the market now sees more chance of rates being higher than lower by November 2017.
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While many in financial markets have been quick to interpret President-elect Trump’s election campaign promises for fiscal stimulus as a done deal, Yellen was more guarded.
While she conceded the Fed may need to adjust its outlook for 2017, she also hosed down the more excitable parts of the market, saying that overall risks are “roughly balanced” and that the economy is only strong enough for “gradual increases”.
For Australian borrowers that means they still have time to come to terms with the prospect of rising interest rates. But not that much time.
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Credit Suisse data currently showing a 4 per cent chance of a rate hike over the next 12 months, but one economist who believes the RBA will start tightening in 2017 is Annette Beacher from TD Securities.
Beacher is looking for above-trend economic growth of 3 per cent in 2016, followed by an even stronger 3.25 per cent next year.
But she admits that despite the solid growth outlook, a rate rise is still not a sure thing: “The RBA is neutral with a laundry list of uncertainties to monitor in 2017. We see a 25 basis point hike in the fourth quarter of 2017, but many hurdles to jump before we get there.”
Next move is down. Probably H1 2017 as the labour market limps along but H2 at the latest. As for mortgage rates, bank funding costs are going to rise so the banks will likely hold back more cuts. Still, I’d expect of the 100bps in cash rate cuts ahead, half will get passed on to borrowers so I wouldn’t be fixing.
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