It would seem that riding on the back of Australia’s mining boom, the economy is heading for some rapid expansion in the coming years with all of Mr Swans projections pointing towards rapid growth.

If we take a look at just two of the key projections:

4% GDP Growth by 2011 – 2012
4.75% unemployment rate by mid 2012 (bordering on what is referred to as ‘full employment’)

It’s difficult to come to but one conclusion; upward pressure on interest rates. We know that the Reserve Bank of Australia is rightly keen to keep a lid on inflation. And in order to do that, with the economic projections that the Treasurer announced, the main way to try and control the inevitable inflationary pressures that such growth will produce is through monetary policy… i.e. interest rates.

Indeed, when asked on ABC’s Lateline Business as to how big of an issue do you think inflation will be, AMP Chief Economist Shane Oliver said that “ I’d have to say there’s certainly a risk on that front. We’ve seen the Reserve Bank progressively revise up its inflation forecasts in recent times.

My feeling would be probably more towards the top end of the target range, up towards 3 per cent.

My feeling is that with the terms of trade boost to the economy, pushing growth up, the likelihood is we’ve got more upside in interest rates to go, probably up towards 5 per cent by the end of this year and maybe up to 6 per cent by the end of next year.”

On the same program, when asked if he agreed with that forecast, ANZ Chief Economist Warren Hogan said that “We certainly would and that’s what we’re forecasting. This economy is going to require some restraint from monetary policy.”

So what does this mean to Mr and Mrs Mortgage Holder?

Mortgage rates in the 9’s! And with the potential for more market volatility, the bank may be under pressure to maintain margins by increasing rates further.

This makes mortgage reduction more and more important to you. With the cash rate currently at 4.5%, and extra 1.5% to the forecasted 6% would add an approximate $300 per month to the average 30 year, $300,000 mortgage.

To avoid the pains of interest rate rises, speak to us today to see how much quicker you could pay off your mortgage using our tailored mortgage reduction package.

Statement by Glenn Stevens, Governor: Monetary Policy Decision

“At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.5 per cent, effective 5 May 2010.

Recently, forecasts for world GDP growth have been revised up again, and growth is expected to be at trend pace or a little above in 2010. Conditions in Europe remain quite weak, though recent data suggest growth is becoming more established in North America. In Asia, where financial sectors are not impaired, growth has continued to be strong, contributing to pressure on prices for raw materials. The authorities in several countries outside the major industrial economies have now started to reduce the degree of stimulus to their economies.

Global financial markets are functioning much better than they were a year ago, but sovereign risk concerns have escalated significantly in Europe over recent weeks. This has prompted additional efforts by policymakers to put fiscal policies onto a sounder footing and to provide support for Greece in the near term. To date, there has been very little contagion outside Europe.

Australia’s terms of trade are rising by more than earlier expected, and this year will probably regain the peak seen in 2008. This will add to incomes and foster a build-up in investment in the resources sector. Under these conditions, output growth over the year ahead is likely to exceed that seen last year, even though the effects of earlier expansionary policy measures will be diminishing. The process of business sector deleveraging is moderating, with business credit stabilising and indications that lenders are starting to become more willing to lend to some borrowers, though credit conditions for some sectors remain difficult. Credit outstanding for housing has been expanding at a solid pace. New loan approvals for housing have moderated over recent months as interest rates have risen and the impact of large grants to first-home buyers has tailed off. Nonetheless, at this point the market for established dwellings is still characterised by considerable buoyancy, with prices continuing to increase over recent months.

Recent data on inflation confirm that it has declined from its peak in 2008, helped by a noticeable slowing in private-sector labour costs during 2009, the rise in the exchange rate and the earlier period of slower growth in demand. In both underlying and CPI terms, inflation over the most recent 12 months was around 3 per cent. Nonetheless, the extent of decline from here may not be quite as much as earlier forecast and inflation now appears likely to be in the upper half of the target zone over the coming year.

With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.

The Board will continue to assess prospects for demand and inflation, and set monetary policy as needed to achieve an average inflation rate of 2–3 per cent over time.”

This rate increase makes it more apparent for mortgage holders to pay their home loan off quicker.

A recent report published in the Sydney Morning Herald* suggested that not only are interest rates likely to continue to rise, but it will be harder than ever for consumers to get a home loan, as some of the nation’s biggest home lenders are expected to slow residential lending growth and turn their attention to the commercial lending sector instead.

The report quotes Martin North, the managing consulting director of Fujitsu Australia and New Zealand, who predicts that, when considering a customer’s viability for a loan, the banks will scrutinise their circumstances more closely than in recent years, looking at factors such as income, savings history, credit rating and Loan to Value Ratio (LVR). North says “If you’re a first-time buyer who wants 95 per cent, without any savings history, you’re going to find it very difficult.”

This is an alarming prediction when considering that, in the wake of the global financial crisis, banks now hold more than a 90 per cent share of the mortgage market. What this basically means is that things are going to get tighter and the banks are picking and choosing who’ll they’ll help. Fortunately for you there are some real and credible alternatives to the banks, offering a broad spectrum of home loan products for just about anyone. Not only that but the rates on offer by some may come as a surprise with variable rates starting at just 6.55%, which is lower than the standard variable rate of the big four banks.**

We also understand that you may have experienced adverse financial circumstances from time to time; we are able to take these circumstances into account and, in most cases, can provide a finance solution that will suit their needs.

To find out more about our range of home loans, or if you would like to discuss your personal scenario with us, please contact us.

*Original article, ‘Banks turn loan shy,’ published in the Sydney Morning Herald, 21 April 2010.
**Source: Canstar Cannex rate comparison service as at 27 April 2010, on standard variable rates for owner-occupied mortgages.