10 October 2012 ~ 2 Comments

What goes down, must come up?

“I think the only thing which is certain, is that uncertainty is likely to persist for some time to come.”

Interest rates are the hot topic in financial circles at the moment. As we approached Christmas, we saw the RBA drop interest rates for the first time in over a year and economic experts were tipping further rate reductions in the order of a full percent throughout 2012.

Just a few months down the track we saw the major lenders break step with the RBA and consumers experienced a rate increase, albeit marginal at this point. Interestingly, in the last few weeks, lenders reduced their fixed rate loans, while many increased their standard variable rates…

What is driving finance costs?

There has been heavy discussion about the increased costs that lenders must pay to obtain funds. Lenders obtain funds from a variety of sources including a minor portion from deposits (for authorised deposit taking institutions such as banks and building societies) and the majority from commercial banks.

Given the global economic situation, there is significant competition in obtaining funding. Although the Australian economy is solid, the risks from countries like the US and the Eurozone are forcing up commercial lending rates, costing lenders more to obtain funding for the Australian housing market. Adding to these issues is the strong Aussie dollar – resulting in having less Australian dollars available to lend to consumers.

So what will be the reality for 2012?

The Assistant Governor of the RBA, Guy Debelle, most accurately commented “I think the only thing which is certain, is that uncertainty is likely to persist for some time to come.” There are contradicting economic indicators including the slowing growth of our economy while inflation is rising.

The Reserve Bank has warned that interest rates may need to rise unless wage pressures ease and Australian businesses and employees become more productive. However TD Securities economist Annette Beacher stated “At the end of the day, if all the major banks start increasing the variable mortgage rate, then the pressure is for the RBA to reduce the overall cash rate.”

How do you decide what to do?

A comparison of available fixed rate loans from banks and non-bank lenders sees a fairly flat rate available over the next 2 to 5 year period. Most lenders are making the same rate available for 2 or 3 year terms with only moderate rises if extended to a 5 year term. These figures are reflective of the uncertainty surrounding the economy. Competition is returning to the market. Non-bank lenders saw a significant jump in the December 2011 mortgage market figures, grabbing almost a quarter of all borrowers¹. Experts are expecting the trend to continue. Competition within the market is always a good thing for consumers, with the larger lenders being forced to provide more attractive deals.

Are fixed rates an option for you?

If you are concerned that rates may again start to rise, fixed rates do provide a security blanket allowing you to accurately budget for the future.

Before making the decision to take out a fixed rate loan, talk to us first as there are some restrictions that may affect your individual situation. These can of course be overcome by locking in part of your loan: however it is best to discuss your individual circumstances before making any decisions.

Call the office and ask for a copy of our article “Is it the right time to fix my interest rate?” or make an appointment to discuss your options.

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