Interest rate hikes signal the end of cheap money

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Last week NAB and Westpac jacked up owner-occupier and investor home loan rates with higher funding costs cited as the key culprit behind the decision.

While the Commonwealth Bank and ANZ are yet to make any announcements on rate hikes, we can safely predict that they will follow suit.

These latest variable rate changes follow a stream of investor rate increases in recent months as banks respond to regulator pressure to stem the pace of lending to investors, which spiked in late 2016 and is widely believed to be the main driver of unsustainable housing prices in Sydney and Melbourne.

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The rate hikes of 2017 are a far cry from 2016, a year that saw banks chop rates to rock bottom levels in response to two Reserve Bank cuts and throw around substantial interest rate discounts in a bid to lure customers away from the competition.

The only bright spot for borrowers is that the latest out of cycle rate hikes will more than likely see the Reserve Bank take a backseat on monetary policy and keep the cash rate on hold for the rest of the year.

Looking further ahead, it's likely that the next move in the official cash rate will be upwards as the local economy recovers and the US market strengthens.

In the meantime, while both owner occupiers and investors will feel the sting of the latest hikes, investors are copping the biggest increases and the gap continues to widen between owner-occupier and investor rates.

Mozo data shows that the average interest rate premium charged on investor variable loans by the Big Four banks is now twice what it was 12 months ago.

With multiple lenders expected to follow the big banks' lead, borrowers should brace for more hikes and carefully factor in what a change in their home loan rate would mean for their monthly budget.

It's a timely reminder for investors and owner occupiers alike to review their mortgage and make sure they're on the best deal going as the era of cheap money appears to be drawing to a close.

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