Thousands Predicted To Default On Home Loans

Most analysts are tipping a 0.25 per cent rate rise on Tuesday sparking fears that the number of defaults on home loans is set to surge.

The Sunday Telegraph has reported that the bank will announce its latest decision on interest rates on Melbourne Cup day at 2.30 - half an hour before the race that stops a nation.

Number of defaults may double

Some economists however, feel that the rise could be 0.50 per cent adding an extra $100 on a $300,000 home loan.

The news will be an added financial burden for many families struggling with repayments and thousands predicted to fall deep into arrears.

Research recently conducted by analysts Fijitsu Consulting and seen by the Sunday Telegraph has shown that the number of people who default on their mortgage payments will almost double from 25,000 currently to 40,000 by the end of 2010.

First home buyers, lured by government stimulus but caught by rising rates, pay freezes and reduced working hours, are predicted to account for nearly half the default increase.

There are many people already having a tough time and paying their mortgage with their credit cards and a rate increase of this magnitude will push thousands over the edge.

Many first home buyers will be particularly hard hit as so many were caught up in the hype of the stimulus and did not stop to think how they would cope with rising rates.

Interest rate forecast

Inflation figures released last week were stronger than expected, plus news that the US has emerged from recession have made a rate rise this week a certainty.

Rates are currently very low and the Reserve Bank wants to get up to a more normal level as quickly as possible.

Financial markets are pricing in a steady increase in the cash rate, currently 3.25 per cent, to around 4.50 per cent by next June, and to between 5 and 5.5 per cent by December, 2010.

Should this take place then the typical standard variable rate at the big banks, which is currently around 6 per cent, will go to around 8.20 per cent and raise repayments on a $300,000 mortgage from $1798 to $2242 an increase of $433 a month.

Some economists do however believe that the Reserve Bank might hike rates every month until the autumn. As long as the economic data points towards a recovery then the Reserve Bank will want to get up to a cash rate of around 5 per cent by the end of next year and that requires seven quarter point increases.

After the rate rise last month, the Reserve Bank stated that it wanted to get rates back towards a "neutral" setting which has traditionally been five to six per cent.

Most economists seem convinced that a 0.25 per cent hike on Tuesday is a given, but they are split on when the next rise will take place. Unemployment figures out on November 12 will be a key factor.

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Published on November 11-nd, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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