I have been subscribed to Noel Whittaker's blog and email database for years now. He is one of the most insightful, no bs leaders in his field and the information he delivers to his readers is above and beyond anything you can receive within Australia. I was reading his latest mail out that included a very insightful view on the current Interest Rates and their predicted future. If you liked the article below written by Noel Whittaker, make sure you subscribe to his blog and mailing list: https://www.noelwhittaker.com.au/
Interest Rates - Noel Whittaker:
The Reserve Bank has just handed down the latest interest-rate decision and, as expected, rates are still on hold. But the big question is where our interest rates going from here. Even though the world is full of good news right now, investors are more confused than ever. The success of the COVID-19 vaccine worldwide gives us cause for optimism, and it also means a new threat: inflation. If business activity picks up again, all that stimulus pouring cash into world markets will start to be eased back. Already, many big investors are dumping sovereign bonds, with the US 10-year yield jumping to near 1.38% and the Australian 10-year yield now over 1.6%.
We currently have huge labour shortages – workers are not available either because they are too happy on Jobseeker or because they can’t get to Australia – and material shortages are rampant due to transport delays. The bottom line is that inflation is upon us, and this means interest rates will go up.
Now I know that Philip Lowe of the Reserve Bank has told us that there will be no rate rises till 2024, but markets are betting it will be one to two years earlier. My friends in the money market are even betting on the cycle turning before this Christmas, and history tells us that there may well be 10 interest rate rises in the next cycle. If we assume each rise will be 25 basis points, it would not be unrealistic to expect, over time, a 2.5% increase in the cash rate. That would take home mortgage rates to 5% per annum or more.
Of course, forecasts are notoriously unreliable, but it seems reasonable to think we are very close to the bottom of the interest rate cycle, even if it doesn’t turn upwards for a year or more.
This is a warning to anybody with any kind of variable rate loan. If you agree with my reasoning, you may wish to think about fixing part of your rate sooner rather than later. But make sure you first understand the comparison rate. Right now on television, for example, Westpac are flogging a fixed rate of 1.99% for four years; but by law they must also mention the comparison rate, which is the effective rate after fees and charges – that’s a much less attractive 3.29%. Make sure you look at the comparison rate, not just the advertised rate.
A great place to start would be one of the comparison websites, where the leading variable and fixed rate loans are listed, with the comparison rate shown clearly as well. Interest rates change all the time, but at date of writing, a three-year fixed loan from U-bank at 1.75% (comparison rate 2.22%) looked to be one of the most attractive. Remember, if you are thinking of switching, you also need to be aware of what other conditions might attach to the loan.
You should also stress test your position, if you have a home loan now. Go to my website and play around with the loan calculators. You can easily work out what the repayments would be if your interest rate went up to 5%. Once you have done that, you should start to increase your home repayments until you get them to a level where you could cope easily if rates did rise to that extent.
I know that the real estate market is rocketing along right now, but if rates start to rise it may well stop dead in its tracks. It’s never been more important, if you’re in the market, to try to get an undervalued property that will hold its value in a slack market. Remember, property values can fall as well as rise.
Written by Noel Whittaker - https://www.noelwhittaker.com.au/