Interest rates heading for 10 per cent, experts warn

MORTGAGE rates are predicted to hit a horror 10 per cent within the next two years as the Reserve Bank hikes rates to prevent runaway inflation.

Soaring commodity prices and rapidly rising employment are stoking dangerous inflationary pressures that the RBA is determined to stamp out.

Macquarie Bank and Commsec have both forecast the RBA cash rate will hit “pre-crisis highs” of 7.25 per cent by 2012. That translates to variable mortgage rates of 10.1 per cent – the highest since 1996.

An economist at Commsec says if iron-ore and coal prices continue to rise, we can expect the cash rate to revert to its pre-crisis level.

The news will strike terror in many homes, especially owners who stretched to afford a property when rates were at record lows last year.

If rates do hit 10 per cent, a borrower who took a $300,000 mortgage when rates bottomed at 5.75 per cent last year will see monthly repayments rise by $839 a month, from $1887 to $2726.

Even if rates hit 9.50 per cent, the same borrowers will see repayments rise by $734 a month.

Modelling by Fujitsu Australia, which runs a “mortgage stress” index, suggests 1.1 million households will struggle with repayments if mortgage rates hit 10 per cent.

The flood of first-home buyers – lured in by generous government incentives – will struggle so badly, they will be forced to sell, leading to a rapidly deflating property market.

AMP chief economist Shane Oliver said such high rates would lead to a big rise in delinquencies, and prices would fall by around 10 per cent.

Article excerpts news.com.au