“So, when do you think interest rates will start to go up?...”
As mortgage and loan advisers, it’s a question we get asked often, and one that is also playing on a lot of minds at the moment. While we don’t necessarily have all the answers (or a crystal ball) we thought it might be useful to take a look at what the Reserve Bank of Australia (RBA) and leading economists are saying, translate that into language we can all understand, and do our very best to help you navigate these tricky times.
Ready for some interest rate real talk? Grab yourself a cuppa (or something stronger) and let’s get into it...
What is the RBA saying?
In its most recent meeting on July 6, 2021, the RBA (who sets the cash rate) decided once again to hold steady at 0.10 per cent, citing that it “remains committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia.”
Although the economy is performing better than expected and unemployment took an unexpected turn for the better despite the pandemic, wage growth is still looking a bit grim and many people and businesses are hurting financially.
While a pick-up in inflation and wages growth is expected, the RBA is forecasting it to be only gradual and modest and announced that there will be no increase to the cash rate until actual inflation is sustainably within the 2 to 3 per cent range. So, when might that be? The RBA says it may not happen before 2024, so it’s time for the economists to weigh in.
What are the economists saying?
While almost all of the ‘big four bank’ economists agree that the cash rate won't be moving in the next few months, or even the next year, they all agree that it will be moving sooner than the RBA is anticipating. Of course, they all seem to have slightly differing views on when the increase will actually begin, so, let’s take a little look at some of their predictions.*
Commonwealth Bank Australia (CBA)
Coming in at the most economically optimistic, CBA is forecasting that the RBA will deliver it’s first cash rate hike in November 2022, with an increase of 15 basis points, taking the cash rate to 0.25 per cent. They expect that to be followed by an increase of 25 basis points in December 2022, and another three 25-basis-point hikes in the first, second and third quarters of 2023. And they’re the optimistic ones.
Following CBA’s lead, Westpac economists recently brought forward their interest rate rise predictions to early 2023, after the unexpected fall in the unemployment rate to 5.1 per cent in June. However, they are predicting the increases will be a little smaller and more gradual than CBA.
Economists at ANZ are forecasting wage growth that will prompt the RBA to move sooner than anticipated and start increasing rates in the second half of 2023, taking it to 0.50 per cent by the end of that year.
While economists at NAB agree that the economy is in a much better position than expected, their predictions are perhaps the most closely aligned to the RBA in that they anticipate the cash rate will remain unchanged until at least early 2024.
*Remember, while these predictions are educated guesses, they are still guesses. So, don’t take any of them as gospel, ya know?
While almost all economists agree that the economy is faring better than expected, and that things are on the right track economically speaking, it’s hard to see this translating into meaningful and tangible improvements in people's actual, everyday lives. When you consider the ongoing lockdowns in multiple Australian states, alongside a rather haphazard vaccine rollout (to put it mildly) it hardly seems a return to any sense of 'normalcy' is on the immediate horizon. With the situation surrounding our latest coronavirus outbreaks changing daily, predicting the movement of interest rates is as much an art as it is a science.
Speaking of lockdown, if you need it, here’s our list of Updated COVID-19 financial support and resources, July 2021 ↗︎
What does all this mean for the property market?
Thanks to a sustained period of low interest rates, there really has never been a ‘cheaper’ time to own property, from a loan perspective.
However, these historically low rates do not mean that it’s easy or cheap to *buy* property, and we have to be careful not to conflate the two. In addition, as we’re all painfully aware, the cash rate isn't a binding contract for banks, and they can (and often do) set their own rates outside of the RBA’s activity.
In regards to the housing market, the RBA had this to say:
“Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors. Given the environment of rising housing prices and low interest rates, the Bank will be monitoring trends in housing borrowing carefully and it is important that lending standards are maintained.”
Clear as mud? To put it more simply: when money is cheap to borrow i.e. interest rates are low, people can often afford to borrow more of it. So, while the money you borrow to buy a home right now might be ‘cheap’, the houses are not - particularly for first home buyers in capital cities
What does this mean for you?
With the official cash rate still hovering at 0.10 per cent, it really can’t get that much lower (or can it?). So, inevitably, there will be a time when rates do begin to creep back up and mortgages/borrowing money will become a little bit more expensive again.
But until we know when that is (remember a little art, a little science), let’s unpack what the current state of affairs could mean for you, and what are some things you can do to navigate this period moving forward.
If you already have a mortgage
While we can’t know exactly when rates will start to rise, the relatively good news is that when they do, the incline will likely be gradual and modest. Though we will take this moment to remind you also that, as we’re all painfully aware, the cash rate isn't a binding contract for banks, and they can (and often do) set their own rates outside of the RBA’s activity.
With all that in mind, here are four things you can do to keep your loan costs as low as possible through this next period (and any time, really)...
- Review your loan
We love to say it, but: ‘your home loan should never be set and forget.’ When was the last time you reviewed your loan? If you can't remember, then we definitely recommend you make some time to do it now. A variable rate loan is a negotiable one, and it really can be as simple as contacting your bank and telling them you want a better deal. If that feels all a bit much right now, that’s ok - get in touch, and we’ll do it for you (for free!)
- Explore a refinance or product swap
If you’ve got a fixed rate loan that you aren't happy with, or your bank didn't come to the party when you asked them for a better variable rate, it might be time for a change of scenery. And, by scenery, we mean bank or loan product. You might also want to use this as an opportunity to explore some lender options outside the ‘big four’ that have good rates and are more in line with your ethics and values. If this sounds like you, and you’d like some help, we are here to guide you.
- Take full advantage of your offset account
You know the drill - if you’ve got an offset account, chuck as much money in there as you can. This is even more important while the cash rate is so low, because any money that you have sitting in a regular old bank account, is actually going backwards. So, why not put it to work offsetting your home loan interest? And remember, you can still easily access the money if you ever need to.
- Make extra repayments now to build up a buffer
The beauty of a low interest rate period like the one we are experiencing now is that it’s a fantastic time to make extra repayments, and build up a ‘repayments buffer’, if you can. Of course, considering we’re living through a once-in-a-lifetime global health emergency, we understand not everyone will be able to do this. But, if you can, great! And if you can’t, know that you are absolutely not alone and meeting your minimum loan repayments in the current climate is still a really great position to be in.
If you’re looking to buy a property
While future rate rises may make your prospective home loan that little bit more expensive, the theory is that they could also have a bit of a cooling effect on the current market, which let’s be honest, has been pretty piping hot. Though, just like interest rate fluctuations, property cycles are also notoriously hard to predict, and even more so right now. As our Managing Director Brendan says:
“The thing about property cycles is that, more often than not, a period of ‘cooling’ is only detectable after it has happened. So, I’m of the belief that trying to time the market only leads to heartache. I'm also yet to come across anybody that has regretted their decision to invest in property sooner rather than later...”
So, here’s our two cents:
If purchasing a property is a financial goal of yours, and you’ve done your finance homework, and you’ve got long-term plans in place to hold onto it - then now is as good a time as ever.
Other things you might like to consider doing if you’re looking to buy a property:
- Get some (trusted) loan advice
We’re probably a little bit biased, but working with a good mortgage adviser who knows their stuff can really save you in the long run. Remember, a bank can only offer you their own loan products, and if there is a better deal available to you from a different lender, they probably aren't going to tell you about it. But we can, and we will!
- Take full advantage of all the grants + schemes on offer (for first-home buyers)
At both a state and federal level, governments have introduced a range of financial assistance schemes to assist eligible first-home buyers to get into the property market. In fact, here’s our nifty round-up of them all! Knowing exactly what you’re eligible for can help you save on some of the costs associated with buying your first property, so it quite literally ‘pays’ to know what’s out there.
- Explore the benefits of using a buyer's agent
While using a buyer's agent isn't right for everyone, for some there can be distinct benefits in engaging one, especially if you’re looking to buy in a highly competitive market like Sydney or Melbourne. A good buyer's agent has the potential to save you a lot of heartache and stress, and their keen negotiating skills can often help you secure that dream property for less. And securing a property for less means a smaller (and cheaper!) loan.
Lastly, is it time to ‘fix’?
To fix or not to fix - the other question we often get asked! It’s a damn good one, and we think it’s always best to look at whether or not to fix your home loan through a more holistic lens, rather than as a bid to try and beat the banks on rates. We’ve written about this before but, if there was ever a time to make a compelling case for fixed rate loans, now would probably be it.
If you are thinking of fixing your loan, here are a couple of things to consider:
- Will a fixed loan be too restrictive for me?
Fixed loans aren't known for their flexible qualities, and oftentimes, you won't be able to make extra repayments, use an offset account, or break the fixed term without incurring some kind of fee.
- Are you planning to keep your property for the duration of the fixed period?
This is obviously a tricky one, and is probably more relevant for people who are thinking of locking in a lengthier fixed period (3-5 years). A lot can happen in one year (#pandemic) let alone three to five, and you could find yourself facing some pretty big costs if you have to break your fixed loan because you’ve decided to sell your property before the fixed period is over.
- Porque no los dos? (Why not have both?)
Turns out that little girl from the Old El Paso ads was onto something - because choosing to have both a fixed and a variable portion of your loan can be a great way to get the best of both worlds. You can even choose how much of each you’d like to have i.e. 60% variable with 40% fixed, or vice versa. The choice is yours!
The decision to fix your home loan isn't one that should be made on a whim, though in certain circumstances, there can undoubtedly be benefits. If having certainty around your loan repayments is important to you, and it’s something that will give you peace of mind during the next few years, then now would be a great time to have a chat with a mortgage adviser that you trust about your fixed rate options.
It’s all about making sure you’re across the fine print, you’ve weighed up your options, and you're making a decision based on what’s right for you.
Real talk that stands the test of time
Just think about how much has already changed since the last meeting of the RBA on July 6, and it’s anyone’s guess what else will happen before they meet again. Ongoing and future lockdowns may very well throw a spanner in the country's economic works and so, we’ll be keeping our ears to the ground for any changes likely to affect your loans in the weeks and months to come.
Because while it is a fool's game to predict with any great certainty whether rates are going to drop, stay the same or steadily climb, interest rate real talk is the kind that will stand you in good stead no matter what happens next.
And, as always, if it’s all a bit much (and let’s be honest, it probably is right now), drop us a line for a chat! It’s what we’re here for, and what we do best.
The finance information contained in this post is general advice only, and doesn't take into account your personal circumstances or goals. You should always reach out, or seek professional advice, before making any financial decisions.