Home loan defaulters set to surge with Cup day interest rates rise

http://www.news.com.au/business/money/story/0,28323,26288344-5016110,00.html

THE Reserve Bank is expected to lift interest rates on Tuesday adding $50 to the average monthly home loan repayment amid warnings the number of defaulters is set to surge.

For the first time, the bank will announce its latest decision on rates on Melbourne Cup day at 2.30pm - half an hour before the race on which Australians bet more than $100 million each year, The Sunday Telegraph reports.

Most financial experts are tipping a rise in the official cash rate of 0.25 per cent, but some economists said the rise could be 0.50 per cent - meaning a $100 increase in repayments on a $300,000 loan.

The news will be a hammer blow for many families struggling with repayments, with thousands predicted to fall deep into arrears.

New research conducted by analysts Fujitsu Consulting and seen by The Sunday Telegraph has concluded that the number of people who default on their mortgage payments will almost double from 25,000 today 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.

"Many people are already having a tough time and paying their mortgage with their credit cards and rate increases of this magnitude will push thousands over the edge" says Martin North, managing director of Fujitsu Consulting.

"First-home buyers will be particularly hard hit because so many were caught up in the hype of the stimulus and talk of a rapidly rising market and didn't give enough thought to how they would cope with rising rates," he says.

Stronger than expected inflation figures released last week, plus news on Friday that the US has emerged from recession, have made a rate rise this week a certainty.

"A half-point hike can't be ruled out even if the odds are slim," says Shane Oliver, chief economist at AMP Capital.

Bill Evans, head of global economics at Westpac, says he believed rates could rise by 0.50 per cent on Tuesday.

"I think the RBA has a degree of urgency about it at the moment," he says.

"Rates are very low and it wants to get up to a more normal level as quickly as possible. It's better to announce a big hike now than wait until rates are higher and then jack rates up."

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 onwards to between 5 and 5.5 per cent by December, 2010.

If correct, this would push the typical standard variable rate at the big banks, currently around 6 per cent, to around 8.20 per cent and raise repayments on a $300,000 mortgage from $1798 to $2242 - an increase of $433 a month.

Similar increases have been factored into Fujitsu Consulting's modelling.

The company used data from its regular surveys of 26,000 homeowners and combined the results with various forecasts about how much rates will need to rise before borrowers can no longer afford repayments.

The modelling is based on three key assumptions: the cash rate rising to 5.25 per cent by December, 2010; unemployment rising by one per cent to seven per cent and inflation hitting 3.5 per cent over the same period.

But while this assumes rate rises spread evenly over the year, some economists believe the RBA could hike rates every month until the autumn.

Shane Oliver says the RBA will raise rates by 0.25 per cent on Tuesday and again in December and February (the RBA does not meet in January).

"As long as the economic data points towards a recovery then the RBA will want to get up to a cash rate of around five per cent by the end of next year and that requires seven quarter-point increases," Mr Oliver says.

Saul Eslake, economist with the Grattan Institute, is not convinced that rates will rise in December, but agrees that rates are heading up towards 4.5 per cent by the middle of next year - meaning a mortgage rate of 7.3 per cent.

"After the rate hike last month, the Reserve Bank said that it wanted to get rates back towards a 'neutral' setting, which has traditionally been five to six per cent," Mr Eslake says.

"But because banks have expanded their profit margins by at least one per cent for mortgages and two per cent on business loans, the RBA will not want to raise the cash rate too high because what it really focuses on is what borrowers are paying. The 'new neutral' is probably now between 4 and 5 per cent."

Most economists seem convinced a 0.25 per cent hike on Tuesday is a given, but they are split on when another rise will be. Unemployment data out November 12 will be a key factor.