Inflation, base rate, mortgage rate comparison

[Mike]

Quote from How many properties to retire? thread.

http://www.somersoft.com/forums/showthread.php?postid=41825#post41825

At the moment i've heard UK and USA both have 2-4% interest rates... I've always figured that Australia lagged both of these countries. If OPM was this cheap, then a lot more ppl would come rushing to property, which would drive up the prices which would drive down the rent yield %'s which would make R/E less attractive.

Current comparison between AUST, UK, USA:

UK

Inflation as measured by the Retail Price Index remains 2.9%.
The Bank of England's repo rate (base rate) is 3.75%.
Standard variable mortgage is 4.5-5% for 80-95% LVR.

USA

Inflation Rate as measured by the Consumer Price Index (CPI) to Jan 2003 is 2.6%.
Federal Reserve Bank Prime Rate is 4.25% (down from 20.5% in 1981).
Current Adjustable Rate Mortgages (ARM) 4.5-5% for 80-95% LVR.

AUST

Inflation Rate as measured by the Consumer Price Index (CPI) Year to Dec 2002 is 3.0%.
Reserve Bank of Australia Cash Rate Target is 4.75%.
Current standard variable mortgage 6-7% for 80-95% LVR.

Can someone please explain why we are paying a full 1% more for our mortgages when our inflation rate is only marginally higher than the UK and USA?

Regards, Mike

 

[D.T.]

*Remembers back to his Year 12 Economics class*

Because interest rates are a tool used for adjusting the amount of spending in the economy. Since Australia has a tiny economy / population compared to the USA, adjusting the rates has less effect.

Hope this helps.

 

[Aceyducey]

Mike,

Think of it in terms of volume.....

If you make 5 million loans per year you can amortise your overheads & make a profit on a small difference between the Prime Rate and Loan rate percentages.

If you only make 500,000 loans per year you need a bigger difference to make a profit.

Also there are competitive factors, legislation, taxes, etc to take into account.

And remember what is always the final reason - BECAUSE THEY CAN CHARGE THIS MUCH!
Perception always counts for a lot - until someone breaks the rules (Virgin Mortgages anyone?)

You can always try for a loan from a UK bank if you don't like the rates here - just watch those exchange rates!

Cheers,

Aceyducey