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Weather forecast for interest rates

Michelle Hudson

After the Reserve Bank increased the rates six times after seven meetings, we are being told that the lending rates are back to average levels, and it is thought that interest in property will plateau due to the volatile share market and higher interest rates suppressing demand and prices.

Markets are betting that interest rates will stay on hold until September. The Reserve Bank is expected to pause to watch the results of the last increases on the housing market and inflation as previous rises resulted in falling retail sales and home loan approvals. There was a lot of discussion about what is happening in Greece and Europe in the meeting, and while Australian markets are more tied to China, we should still be wary if the situation in Europe worsens.

Seventeen economists have predicted that the cash rate will rise from the present 4.5 per cent to between 4.75 per cent and 5.2 per cent by the end of the year. CommSec economist Savanth Sebastian recently stated that CBA might still have to raise the lending rates independently of the Reserve Bank as the cost of funds is still rising. Previously, banks would use depositor’s funds to lend to customers needing finance, but because Aussies saving as much these days, lenders have to go cap in hand and borrow overseas at higher wholesale rates. Of course the banks have to look good (they need to have a solid loan book with minimal arrears) or they can’t borrow the money, which is why they have had to readjust their policies and why they appear to be a bit tighter with lending at the moment.

We must keep in mind that when the Reserve Bank raises the interest rates they are gradual increases. If you fixed the rate today at the three-year benchmark rate of 7.65 per cent per annum, you are essentially paying a premium for the security of a fixed rate and knowing what your repayments are going to be. When you fix you are making a bet against the money market when the market doesn’t know what is happening next either! It would cost an average $275 000 home loan over $600 more in repayments after three years to fix at the current three-year benchmark rate (7.65 per cent) compared to a two per cent rise to the current benchmark standard variable rate of 6.63 per cent.

It’s possible that we will have three months’ breathing room now to plan before the next rate rise. Choose a loan with a low interest rate, and put any surplus cash onto your loan to reduce the balance and reduce the impact of future rate rises. Use this time to build a buffer either into your loan (if you have redraw) or if you can’t put funds onto the loan, hold them in your offset account or deposit them into your savings account so that you have some emergency funds in case you need them.

Of course, there’s no right answer for everyone, so it’s important that you do your research and consider your own situation before taking any action.

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Author's Biography

Michelle Hudson is a Finance Broker and founder of The Loan Lady.

Michelle has been in the banking and finance industry for over 30 years assisting people to finance their dreams from motor vehicle purchases through to property and business purchases.

‘I help you find the loans that the banks don’t advertise.’

Email Michelle on michelle@theloanlady.com.au or look at the website www.theloanlady.com.au