Loss of AAA rating bad news for borrowers

According to LoanDolphin CEO Ranin Mendis, if domestic banks receive a follow-on downgrade there is “the very real possibility” that the Australian households would feel the pain from higher mortgage costs.

“I believe that we will see a steady increase in mortgage rates in 2017 as banks face stiffer competition globally. This would have a flow-on effect to property prices and we could see a slowing in growth,” Mr Mendis said.

“If home owners or prospective buyers are concerned, this could be a good time to fix loans and there is a distinct possibility we may see banks stop or reduce their lending to high LVRs,” he said.

While the AAA rating is a rare commodity for many countries today, Mr Mendis says that if we were to see our sovereign rate downgraded and banks also receive a downgrade, we may see a steepening longer-run yield curve resulting in the cost of funding for banks to rise – placing pressure on interest rates.

“If Australia was to receive a AA rating, it means that when our banks go offshore to raise money, they will be competing with a higher number of AA countries,” he said.

Mr Mendis’ comments come after shadow treasurer Chris Bowen outlined the negative ramifications for Australian banks and households if the AAA rating is lost.

Speaking at the National Press Club on Wednesday, Mr Bowen said the loss of our AAA credit rating and downgrades to our banks would “ricochet through the economy” through higher mortgage costs for households and businesses at precisely the wrong time.

"This is not to mention the impacts a downgrade would have on confidence in the community,” he said.

[Related: S&P downgrades Australian outlook to 'negative']