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    Default Families facing credit crunch

    Families facing credit crunch

    Scott Murdoch | January 01, 2008

    AUSTRALIAN households are about to be swept up in the global credit crunch, with the major banks raising interest rates across the board in an effort to protect their profit margins.

    Lending rates for almost all loans - particularly fixed home loans, investment loans and some credit cards - have risen in recent weeks by more than the Reserve Bank's 25 basis-point increase in November.

    Most at risk are credit card holders, who owe the banks a record $31 billion and face interest rates of up to 19.9 per cent as the Christmas bills fall due in coming months.

    The Commonwealth Bank, the nation's biggest mortgage holder, yesterday became the latest bank to lift rates when it boosted all its fixed-rate home loans by 30 basis points to 8.64 per cent for one- to four-year mortgages.

    The majority of fixed-rate loans, apart from the Commonwealth's, remain lower than the standard variable rate, which rose to 8.57 per cent in line with the Reserve Bank's November rate increase to an 11-year high of 6.75per cent.

    Economists believe the mortgage rate could hit 9 per cent this year as the central bank is forced to raise official interest rates to contain inflation. Banks and other financial companies are raising rates faster than the Reserve Bank to recoup their higher borrowing costs in global financial markets. Interest rates have risen around the world in response to the crisis in the US sub-prime, or low-quality, mortgage market.

    Cannex senior financial analyst Harry Senlitonga said there had been increases in fixed-rate loans by most of the major banks.

    The rises come as new figures show the financial future for some families appears bleak, with consumer debt at record levels.

    With record spending reported over Christmas, statistics from the Reserve Bank show the five interest rate rises over the past two years have failed to slow spending on credit. Personal loans and credit card debt held by consumers with the banks is at $151billion, up 13.2 per cent compared with a year ago.

    According to the Australian Prudential Regulation Authority, the total credit card debt is at least $31.12 billion, with the main four banks dominating the market.

    CommSec equities economist Martin Arnold said despite record employment levels, some families would have been forced to borrow to survive over Christmas. "The November rate hike has not dented the desire of households to borrow," he said. "Despite rising petrol prices and interest rates, borrowing remains firm and evidence suggests consumers have been spending heavily."

    The ANZ has lifted some of its Gold Visa credit card rates to 19.9per cent, which prompted the NAB and Bank of Queensland to lift rates by 35 and 50 basis points on low-rate cards. The interest rate on BankSA cards was raised by 25 basis points to between 13.5per cent and 17.25 per cent.

    The major banks have yet to raise their standard variable mortgage rates because of political pressure during the election campaign. They are also keen to keep pressure on non-bank lenders, such as Wizard, which rely more heavily on international credit markets for their funding rather than customers' deposits.

    The variable rate offered at Bendigo Bank is now 8.6 per cent - slightly above the standard 8.57per cent - because of its reliance on the credit market.

    Bryan Fitzgerald, a spokesman for the Commonwealth, said the bank was facing higher funding costs because of developments on world financial markets.

    The NAB has said its costs are nearly 40 basis points higher than a year ago, before the sub-prime crisis hit. And the ANZ said some of its credit card rates were raised because the full 25 basis-point hike from the RBA was not passed on to customers in November.

    "There's one way to find out if a man is honest-ask him. If he says 'yes,' you know he is a crook." Groucho Marx


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