Low Interest Rates Have Negative Impact in Credit Growth

The decision of the Reserve Bank of Australia (RBA) to lower interest rates resulted to a failure for possible credit growth in the country since households are racing to finish off their debts rather than adjust their monthly payments, Australian Banking and Finance reported.

When the decision was made, RBA expected that demand for credit will be stimulated. What happened was the opposite since households were more conservative after the global financial crisis.

Supposedly, when interest rates were decreased, households will also lower down their mortgage payments to save some cash. But ever since the global financial crisis, households are racing to lower or finish off their mortgage so that they will be readier when a similar crisis happens.

From October 2011, the extent of prepayments of housing credit growth was decreased by at least 0.5 to 0.75 percentage points. According to a research made by Marc-Oliver Thurner and Alexandra Dwyer, credit should be increasing especially when interest rates fall down.

But the research mentioned that the last two years showed a modest growth when it comes to housing credit. This was compared in the increase in the value of housing loan approvals.

Making Prepayments

Households are prepaying their mortgages more quickly than when the interest rates were higher, another report in The Australian noted. Apparently, only about half of Australian households lowered down their mortgage payments when the interest changes happened.

It means that a considerable portion is making prepayments to end their debts early. Mr. Thurner and Dwyer, working at RBA's domestic markets department, found out different results from the two sets of data they gathered.

Because of this, they decided it prudent to also undertake two different simulations.
Analysts expect the impact of the prepayments to be felt by middle of next year.
However, under the first stimulation, the effects of the partial prepayment will be tapered off by the expected strong flow in new loan applications.

Banks should make sure though that there will be new loans since if there only a small number of housing loans, it may not be able to taper off the effects of the prepayments.

In the second stimulation, the two authors pointed out that the cumulative effect of prepayments from the 165 basis point reduction in the standard variable rate--from October 2011 to June 2013--will cut the housing growth by 1 per cent.

In 12 months to June, the cut will be 0.8 percentage points, the Australian Banking and Finance report stated.

at 8:24 PM
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