Up, up and away. Why are mortgage rates on the rise?

Australia’s property investors and debt slaves were in shock on Friday, when Westpac joined the ranks of smaller banks, significantly hiking mortgage rates out of cycle, on its fixed term loans.

Westpac’s five year fixed investment loan will jump 60 basis points or 2.4 times the standard Reserve Bank increase to 4.79 per cent come Monday. Two and three year investment loans will rise 30 basis points, while two and three year owner occupier mortgages will increase 24 basis points. It follows earlier rises by Westpac’s RAMS and a 60 basis point rise from the Bank of Sydney.

Over the past fortnight, another ten smaller banks had increased rates.

Investors were too naive and complacent to see it coming, but they should have. Banks are facing pressure on a number of fronts.

IRB Risk Weights

Australian banks not the safest in the world – far from it – 8th December 2014.
Have the Big 4 just flunked APRA’s stress test? – 16th November 2014.

As we have reported over the years, Australia’s big banks or IRB (internal ratings-based) banks – Westpac, Commonwealth, ANZ, NAB and Macquarie, have been abusing their size and status. As silly as it sounds, regulators thought these banks knew what they were doing, so they were given the power to risk rate their own mortgage books. As you can guess, in a bid to enhance profitability at the detriment of financial stability, the IRB banks rated the risks on their mortgage portfolios so dangerously low so as to not have to hold as much expensive loss absorbing capital. After all, the taxpayer would be at hand if they needed to be bailed out. A stress test conducted by the Australian banking regulator in 2014 found that the five IRB banks were insolvent, if they were unable to access further capital, after a moderate housing and commodities crash. Something had to be done.

Effective 1st July 2016, APRA has raised the average risk weights for the IRB banks to a minimum of 25 per cent. This will require the IRB banks to hold extra loss absorbing capital to assist with solvency in a banking crisis. The banks have two options, reduce the level of profitability, or hit up mortgage holders. The later is preferable, as at some stage the banks may have to – go cap in hand – to shareholders to shore up balance sheets when default rates materially rise.

“Regulated banks” i.e. all our other banks, have a minimum risk rate of 35 per cent, so the big banks are still unfairly advantaged.

Net Stable Funding Ratio (NSFR)

As part of the International Basel III accord designed to make banks more resilient, banks will have to start relying more on domestic deposits for funding, rather than the risky overseas wholesale markets. A global shock (brexit, Italy, Europe, China etc) could cause liquidity problems for rolling over short term debt. As Australia’s household debt rapidly grew, Australian banks relied more heavily on short term wholesale debt markets to get the much needed cheap funding to satisfy Australia’s craving for perpetual debt.

APRA says big banks at risk from short-term, wholesale debt addiction – The Sydney Morning Herald, 16th September 2015.

Australia set to lose AAA credit rating

S&P fires first shot across bows – AAA rating placed on credit watch negative – 7th July 2016.

As we reported in July, Australia is on a credit rating outlook of negative with ratings agency Standard and Poor. S&P, at the time, said “There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.””

Since the warning, Prime Minister Malcolm Turnbull and Treasurer Scott Morrison has more or less sat on their hands when it comes to budget repair. Only this week, former RBA board member John Edwards has suggested cutting negative gearing subsides to secure our AAA credit rating, but the Prime Minister has ruled out the change to prevent any backlash from Liberal backbenches who heavily depend on the negative gearing gravy train. The problem facing the soft Prime Minister, is he can’t find any cuts that won’t effect someone. Today, even former coalition Prime Minister, Tony Abbott has called on Turnbull to harden up!

Australia’s over extended and risky banks are seen only as safe as a government bailout, and hence cannot have a credit rating that exceeds the government. The loss of the government credit rating is expected to make any overseas wholesale funding more expensive.

Former RBA board member John Edwards backs negative gearing change to secure AAA credit rating – The ABC, 25th November 2016.

The Trump Effect

A future with Donald Trump, leader of the free world, is the hardest to predict, but has attracted most of the blame for rising interest rates. Trump policy is largely expected to be inflationary with pro-growth, large infrastructure builds in the wings. His election win earlier this month has caused pandemonium in world debt markets, but there is some evidence to suggest bonds have been out of favor since August. Whether the bond market sell-off started in August, or November with the election of Trump, bond yields are heading in one direction, up, and is considered a good proxy for future interest rate moves.

Janet Yellen, United States Federal Reserve chair, is expected to move on American interest rates in December.

Should we panic?

Australia’s banking regulator has repeatedly maintained banks should have a serviceability floor of 7 per cent for when interest rates inevitably go up. Provided banks didn’t flout this requirement, there should be some scope for rising interest rates over the next 12 to 24 months.

But then, who is confident the banks screened mortgage applicants with a 7 per cent floor? Certainly not me.


  1. The Central banks have blown the biggest bubble imaginable in almost everything, through the use of “fictional”reserve banking, fiat currency, and unbridled credit creation. Now that a populist, and strongly independently US president has emerged, there is danger and uncertainty for the establishment. It is therefore time to spring the trap and suck the life out of the economy and show who really is in charge.
    Governments have no options in a rising interest rate environment, all they can really do is try and blame someone else for the problem. At least houses get cheaper for those with any purchasing power left. Looks like 2017 could be the year!

  2. “But then, who is confident the banks screened mortgage applicants with a 7 per cent floor? Certainly not me.”

    A brilliant concluding sentence to this posting.

    The economy may not crash, many people certainly will crash, very few will come out very rich.

    The tears before bedtime shall come, the howl of regret across the dark sky beneath the full moon, as the many will realise in horror, it’s nothing personal, just business. They shall be presented with their signature above the dotted line as they protest their servitute, then they shall be congratulated, and reminded, of the the debt(s) that belong to them.

    – First prophecy of njc.

    Sorry, I could help being so corny.

    Good article Admin.

  3. 7% Floor????

    LOL, what a laugh, given over 50% of mortgages are now interest only, it’s pretty clear, unless retails rates approach zero, the system will collapse under itself.

    Rates going the other way???? Let’s see where this goes.

  4. Can someone explain how the loss of AAA affects the borrowing banks do? I thought the accessed most of their cash here?

    Also, our Government debt to GDP is much better than other countries, were only about 36 % GDP , many other countries are much higher, doesn’t this mean we’ve got plenty of borrowing room if we needed it?

  5. Jamie

    Let me save you from the rubbish that is thrown around by the media.

    1) Ratings mean jack squat – its a chest beating exercise.
    2) Credits rating Agencies gave US subprime junk bonds a triple A rating – they are corrupt and should be outlawed.
    3) The govt doenst need to issue bonds but does because corporations and countries like the safest asset that there is.
    It is safe because a monetary sovereign govt can never go broke … so rate that agencies
    4) agencies are a for profit org that looks after its bottom line.
    5) The govt auctions of bonds and the market goes into a frenzy to buy bonds driving the price down.
    6) Even if no one wanted to buy govt bonds then the RBA would buy them
    7) Even if the govt couldnt get the price the RBA buys them instead.
    8) the govt controls the yield curve.
    9) the govt owns the game of AUD and will never lose or go broke.
    10)Japan has 7 times the debt, a single A rating and int of govt debt is -0.2% … how is that expensive

    In a monetary sovereign nation like ours govt debt isnt really debt at all … its just extra money in the economy that hasnt been taxed back yet.
    If the economy needs more money in it then why try and take it out ?

    Taxpayers do not pay for govt debt … govt pays for govt debt out of the securities account.
    Interest on govt debt is new money added to the economy.
    Your superfund probably has govt bonds and earns interest on govt debt.

    The govt doesn’t borrow to fund spending … spending is fiscal policy borrowing is monetary policy. They serve different purposes.

    “Borrowing” means the govt draining excess cash out of the overnight money market to maintain control over interest rates .. too much cash in the reserve system puts downward pressure on interest rates …

    To learn more take a look at Modern Monetary Theory.

  6. Most capital for mortgages comes from overseas. Last I checked it was estimated only one per cent of capital comes from Australian depositors. The rest has been coming from primarily China, NZ and the USA. Lately, due to issues in NZ and China, mortgage capital is likely to come primarily from USA which is why promises by President Elect Donald Trump to raise interest rates will effect Australian borrowers. The drop in the Australian dollar is also going to drive up interest rates (the likely cause of this rise). As for government spending to GDP, it’s less of an issue than personal debt to GDP as it places the entire country at risk of financial pain. We need government spending, as long as it is intelligent, and does not encourage risky personal debt.

  7. The loss of the AAA rating makes capital more expensive and banks will make lending criteria stricter. A loss of AAA will likely increase rates and drive down prices.

  8. Some interesting theories here. What no one has mentioned is crucial. The Federal Reserve Bank of the USA, is a company. It is named misleadingly, on purpose. It is not federal. It is privately owned, with ownership a deliberate mystery. So the first thing you NEED to know is, government borrowing, from the FED, see’s that interest is paid TO THE PRIVATELY OWNED FED.

    so that’s the first key to the puzzle: Government interest is paid to a privately owned banking cartel.

    The second main piece is that over the last 100 years (since 1913) the move from fixed currency to a fiat currency has seen the currency:
    A: Loose 99% of it’s value against gold
    B: The power of the currency transferred from the people, to the FED. IE. a handful of people/families.

    So what about a fiat/flexible currency base??? It NEEDS government borrowing, yes NEEDS. All things being equal, if the USA paid off it’s deficit, then there would be financial chaos. The debt ceiling, is a total smoke screen. A parade of stability created to make the public believe things are ok.

    Modern/classical/MSM economic theory is a scam, a total lie, a failure: Remember NONE of them seen the GFC coming, NONE seen the dot com crash coming, NONE seen the Asian Crisis, NONE seen the Saving and loans crisis… Do I need to go on?????

    The two most important things you can educate yourself on are:
    1: The creature from Jeckyll Island, not sure if legal or not, but PDF’s are online: This explains the fed and the currency system. It explains why Bush and Obama gave the banks over one trillion dollars…. Even though it was published in 1994……
    2: Mike Moleny’s Hidden Secrets Of money youtube series: Yes he’s a gold peddler, yes he’s selling something: But read his story, his mom lost a heap of cash in the GFC, and he went about learning WHY her advisor didn’t see it coming:Because they worship the wrong financial models!!!!!

    Another great resource is ‘The ascent of money’ by Niall Furgusen, a Professor, who goes against the grain: It’s available as both a DVD series, or a book: I have both, and both are awesome.

    Talk to your family and friends, I bet they are mostly working harder then ever, more worried about their jobs than ever, in more debt than ever and yet feel like they are drowning…. This isn’t right is it??? We’ve got interest rates at historical lows, we’ve got access to technology we could only dream about 15 years ago. We’ve got governments and central banks spending cash like there’s no tomorrow, but where is the prosperity?? Where is the reward for your labour and effort?? and this while the economy is ‘strong’ and ‘sound recovery’ and all the other BS terms the MSM media use.

    It’s all crap.

    The answer is of course provided by understanding that FIAT currency strips a percentage off your labour and effort, every single day, and the larger the debts get, the larger the stripping… Add in inflation (which is way higher than reported), watch this video https://www.youtube.com/watch?v=LqcHG7QUK9k

    and you’ll learn that, inflation, in a doubling period DESTROYS ALL the currency from the previous doubling period… WOW, no wonder the 95% are struggling!!!!!!!!!

    So what to do??? I’ve said it for years, prepare. Get rid of as much debt as possible. You DO NOT need a car loan, you DO NOT need a credit card, you NO NOT need a $120 a month phone plan, etc. In fact, I rent, but seriously, unless I’d paid off 50% of the current value of a house I would sell it: It’s not like there will be a better time to sell (Yeah, and when your mates say rent money is dead money… Ask what interest payments are?? Are they ALIVE? Nah, they dead too! LMAO).

    If you’re employed, you need to seek a second source of income: Can you teach a dance class? A yoga class? Mow lawns on the week end?? Do something that if you loose your job can get you going ASAP.

    Me I’m self employed, and built one of the strongest, stablest companies my accountant and bankers have seen: Yes it’s hard work, yes it’s LONG hours, yes I don’t see the wife much. YES IT’S TIRING. But when I see my old mates, who’s pay has been slashed by 25%, while they work the same or harder, and still don’t know if they have a job in 1 months… There’s no comparison.

    This finance driven world we live in (check the ASX, it’s all banks, and one telco the government is hell bent on destroying since it sold down it’s future fund holding:- Corruption? No, not here surely), is far from stable. 2009 was a shocker for most of the world, but the reality, the next one will be far worse: 4 times as much base currency, higher unemployment, less chance of jobs with automation, higher government debts, it’s a hell of a cock tail.

  9. I still remember Christmas 1989, I was just a kid, but I remember talking with my friend’s father about the economy.

    Mortgage rates were 17.0% !!!!!

    Oh the memories…

  10. The amusing news from our propertocracy leaders that Treasurer Scott Morrison said the government will make changes to the foreign investment framework to allow foreign buyers to buy an off-the-plan dwelling that another foreign buyer has failed to settle as a new dwelling. If these political elites keep enriching their developer mates we are going to finish up with Pauline Hanson as PM a la Brexit/Trump.

  11. @14 – No housing market collapse from where I’m sitting. Sydney’s bubble is still inflating. A house I inspected 12 months ago for $1.8m sold last weekend for $2.6m! $800k clear untaxed profit for DOING NOTHING! Does hard work pay? Really?

    This country is a fucking joke!

    The more I save, the higher the house prices. It is sheer madness.

    Will I ever own my own home?


  12. Well. We all have to ride it out. Change the laws to benefit the most weakest in the housing market.

  13. “Mortgage rates were 17.0% !!!!!”

    I too remember that as a kid. My parents were hurting with a house loan too. It actually affected me in my thinking. When I see people borrowing to their income limit at 4% interest to get their dream home, I just can’t help but think of that 17% era and the potential risk these people naively take on.

  14. @15, I agree! A house in my suburb (Northern NSW) sold for $500,000 6 months ago and then recently sold for $715,000!! The investor pumped $150,000 renovating it, but the point is, someone was willing to pay for it!!Alive and well here too, I’m afraid.

  15. The only reason this bubble has not poped yet, is because it just has not popped yet. No need to over think it. Keep busy and it will happen. So many idiots on interest free loans, on 500k thats an extra 10k per year, not smart. Australia is not super human and special, we are human here and prone to mistakes. Usually people repeat the mistakes of others and this Real Estate thing is just another one of those things. It wont be the last mistake Australians or anyone makes. Nothing to see here just typical human behaviour at its best.

  16. @14 & @18

    Yes I agree. “Aussie housing market collapses” is wrong, even though the article itself is good.

    The market is not dead. Logical thinking says the market should be dead, but its so incredibly resilient. Seems like you could kick while its down, shoot it in the head, drive a tank over it, blow up a nuclear bomb and it would still be alive.

    @10 Matty, Good on you for running your own business. I’m working hard saving money to do the same. But here is another thing which really really pisses me off in a big way: people in Sydney who like @15 Rupert said make a quick $800k clear profit, sell up, come up here to QLD, and use this money to buy a business. They walk straight into a great business having done absolutely nothing to deserve it. F–k this country is starting to piss me off.

  17. @JamesR

    Yes, I understand your frustration at what you see. But!
    These guys, will stuff up running a business: It’s that simple. Less than 2% of them will make it work, they will blow their big payout.

    So that’s great for the business owner who otherwise would be struggling to cash out. Of course their are guys raiding this too, the franchise boys are doing their best.

    Years ago I expected a rough recession, but what Australia has baked is simply beyond belief. I know dozens of my wives work collegues with $100+k incomes, yet don’t have a penny to spare, literally they will cry over needing $100… WTF???

    Where is it?? Sure some is wasted on lifestyle, but most of it is wasted on building those billion dollar bank profits, AKA interest repayments.

    For the record, there are well respected ‘non-conventional’ guys saying we are only 1/2 way through this cycle, we need to wait til 2026…. Wrong. Their models assume situation normal, check the debt levels, their rates of growth, the countries terms of trade, our inflation/interest outlook, OUR BANKS OFFSHORE FUNDING POSITION.

    None of this will go for another 10 years: Simply impossible.

    Add in the fact, we are due for another USA recession (every 8 years, last was in 2009), and if you think hard, the world economy froze in 2009…. Now, what will happen this time??? There is a real chance (I’m not saying it will, but it’s a real chance) the world economy breaks… YES BREAKS.

    No open trade, massive tarriffs, stuff all exports

    The day our parents warned up about (ie. off shoring everything) will be here: The cost to live will be impossible for most.

    They are all talking about the rise of the right, I don’t think that’s so true, it’s the rise of the fascist: People want protection, pure and simple.

    I’ve been saying for months the top is in: I’m convinced it is, Melb and SYd are doing their own thing, but I expect this time 2017 we will be smuggly saying ‘we told you this would happen’.

    Oh, and my business is far from a cash printing machine: It rewards real hard work, (like things should!). I barely make the median wage, but I wont ever get called into the office and told my days are up. I will have people wanting to franchise off me, then the dollars will come.

  18. It wont matter how much there house is worth. Most dont have the balls to sell to give something else a go because they think this is normal. Patience. It doesnt matter when it will happen but it will.

  19. How many of the readers saw the frontpage article in the “Weekend Australian” just after Mr Trump won? They talked about the town of Scranton PA were Mrs Clinton’s family are from. Median income $38,000 and median house price $107,000 (? $US or $Au is irrelevant).
    One of the guys they interviewed paid $5,000 for his house and fixed it, with the help of his unemployed mates, using skills learnt off UTUBE videos. It couldn’t happen here, could it? Say it isn’t so!

  20. @ Geoff

    Well, yes and no. There are certainly pockets of rural Australia where housing costs are minimal: You need to decide if working on a farm for $15 p/h is what you want to do in exchange for cheaper housing.

    Australia, believe it or not, has actually done a pretty good job of spreading the wealth, we don’t have a massive poor class, and a massively shrinking middle/working class, like the USA, yet. YET.

    It’s happening though, probably at the fastest rate in the last 30 years. And it’s all due to this property fixated economy.

    The terms the media use even confirm it’s a massive bubble, but the just don’t get it: Terms like ‘break in to the housing market’…. break into the market?? Like it’s some secret jocks club, that only a few elite can ever join.

    Well guess what? You over pay to join that club and run out of buyers (particularly fresh buyers) and you will be left with a horrible devalued asset at the end.

    There’s so much meddling going on at the moment, you have to acknowledge that the end is nigh.
    Retail rates rising
    Clamping down on owner/developers
    APRA messing with funding ratio’s
    Politically meddling
    Sub contractors going broke
    OTP contracts falling through (so much so SM is making it so they can be resold ‘as new’)

    That’s just a few things, there’s plenty of other signs of panic.

    Things are getting hectic.

  21. When this blows up the government will be blaming trump and every other irrelevant factor they can think or whilst ignoring the fact its been engineered for the past 25 years. I hope they don’t turn this place into a landing place for mass immigrants to create demand. It’s about the last card there holding… I hope it explodes, this has to be one of the longest running bubbles ever.

  22. @ Jamie
    You are absolutely 100% correct .
    The ” last card ” is playing right now .
    Just take a walk through your suburban shopping mall .
    Locals are coming to me ,on the street in suburbia , asking for money
    and they are not migrants .
    I am not wealthy and my t-shirt and shorts are over a decade old .
    Strange days .

  23. Oh Yeah!

    Everything but agricultural and mining is soft. Good on farmers- 7% rise!

    Soft and so has been the last quarter which we are in the last weeks of. Die is cast. We aren’t falling behind, it’s more the time is up. Wow, boy…didnt we pump this bomb full of toxic fuel…

  24. Private New Capital investment into this country has now declined for the 12th consecutive quarter in a row. In 2012 , we trend was around $43 billion , now $27 billion. Dig through the data, were back at GFC levels of investment.

    From the ABS
    “Estimate 4 for total capital expenditure for 2016-17 is $106,926m. This is 14.3% lower than Estimate 4 for 2015-16. The main contributor to the decrease is Mining (-33.6%)”

    And more staggering , the drop in mineral and petroleum exploration


    There’s no new private money flowing in like it did post GFC.The Contribution of Mining and construction toward GDP peaked start of 2015/16. Since then it has fallen,and is now glaringly obvious given our latest -0.5 % GDP.

    The government now has no option but to dip into the budget and try and salvage some of the mess by spending on infrastructure, yet do you hear of them planning this? Theyre too interested in surplus. ‘

    The New capital Inflow pulled us out of the GDP hole of – 0.7 % last time post GFC , but where is the money to do the same this time…its not there. Further , rate cuts are not stimulating business or private credit expansion..Business credit has dropped noticeably since start of 2016 , private credit is terrible and has contracted all 2016 , not even one single month of expansion.Both of these measure have responded to interest rate drops through 2011 onwards but not any more. APRA have clamped investor loans, wage growth is stalled, Owner occupier credit uptake is struggling because of the median price to income multiples.

    This to me looks like the party is over.Has anyone else noticed how much Turnbull has said in the past 12 months we need to live within our means i.e households need to spend conservatively , only 3 months ago..

    “It’s not for me to give lectures on household finance but I think most Australians are very alert to the fact that while interest rates are low they haven’t always been low and that you’ve got to be prudent in terms of your borrowing,”

    Then goes on to say..

    “It’s up to the Reserve Bank to maintain financial stability, and they have a number of levers, interest rates being the most obvious one, to address excessive borrowing if that’s the right term.”

    Sounds like the RBA are going to save us with their interest rate leaver that’s not doing anything lol, recession by 2017.

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