Cheaper mortgages prompt over-commitment: FBAA

by Calida Smylie13 Jun 2014
The Finance Brokers Association of Australia is alarmed at reports that cheaper mortgages could be on the way due to the European Central Bank's decision to push interest rates into negative territory.
 
The ECB took the drastic step one week ago of dropping the deposit rate to minus 0.1%, which means banks will have to pay to deposit money with it.

The move is hoped to encourage banks to lend their money instead, ideally to businesses, to boost the economy in general.
 
Analysts say the move to introduce negative interest rates could drive more European bank investors towards bonds or mortgage-backed securities issued by Australian banks, pushing down the sector’s ­funding costs.

But FBAA chief executive Peter White says while all borrowers like cheaper rates, it will also encourage people to overcommit without taking future rate rises into consideration.
 
“Our response to these media reports is 'caveat emptor' - buyer beware – as rates that are too low can only go in one direction.”
 
Abnormally low rates may encourage more loans but, “the upwards correction could be quite large to compensate the extreme low”, White says.
 
“This will not only remove any advantage borrowers had but could have the reverse effect and result in people losing their homes due to a failure to meet increased payments.”
 
The FBAA advocates for banks to absorb increases to protect borrowers, and banks should equally absorb any unusually low cost of funds, White says.
 
“Borrowers thrive when interest rates are more constant. Any drop on the cost of funds simply won't last. It can’t.”

The ECB broke new ground by becoming the first major central bank to have a negative deposit rate while also proving up to €400 billion ($585 billion) in cheap loans to lenders.

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