So you’d think, pardon the pun, that when predictions from all the experts were, that the RBA was going to keep rates on hold, that, well, rates would be kept on hold. Mind you, last month the experts predicted, on the whole, a rate rise and the RBA, like So You Think, failed to deliver.
6-10-2010 – 1.06am
The RBA has announced that it will not increase the cash rate in Australia, given all current lenders another month to chew over the prospect of a rate rise. It seems that the global markets are of a concern for the RBA and that Australia, whilst performing strongly does not yet warrant the sting of another rate rise.
There is a great quote in a Joe Jackson song that refers to the amazing amount of choice that we have in society today. But the song goes on to explain that “they say that choice is freedom, but I’m so free it drives me to the brink”. In other words he is going insane with all the different products available, and how on earth is he meant to know what to choose. It would be fair to say that when comparing home loans its a bit the same.
It seems that tomorrows RBA meeting will see the cash rate rise. With analysts being reported to have factored in a 50-60% chance of a rise. And this, at a time when the Bankers Association and Banking Executives are signaling…
> To Fix or Not to Fix your loan?
Sorry to use such a headline, as it’s a scary thought. But this could well have been the headline in the papers back in 1994. And such a thought gives rise to the question, should I fix my loan or not.?
Taking a look at historical RBA rate changes shows, on simple investigation, that
- Coming out of the ‘recession we had to have’ the RBA lifted rates between Aug 1994 and December 1994 by a whopping 2.75% – in just 5months.
- And on the reverse, going into the 90’s recession, the RBA reduced rates by a staggering 10.0% between Jan 1990 and Jan 1992, and even further reductions in the 18 months after that.
- In the 8 months from September 2008 to Feb 2009 the RBA dropped Interest rates an extraordinary -4.0%. And whilst banks didn’t end up passing on all of these reductions, claiming the impact of the “Global Cost of funds”, most existing borrowers did get a significant reduction in interest rates on existing loan. Unless of course you had bet against the markets and locked in a fixed rate product.
And whilst no-one is using this past to predict the future, the important insight here, is that rates can move significantly during short periods of time, and borrowers need to consider this risk, when planning their budget.
What could your household budget handle?
Of course no one is suggesting that this is going to happen, or that it is likely. In fact, no one can ever predict with absolute confidence the future of rate changes.
But for home loan borrowers at the time, this would have been a daunting prospect. And so, it’s an important consideration for all new and existing borrowers in 2010 – 2011. With Banks indicating that they may raise rates, regardless of RBA changes, “Scenario Planning” for your household budget, is a sensible way to see if you can handle the costs of home loan rate changes.
Being Money Confident – Asking the right questions!
Which is where a good broker, banker and good planning come in. It doesn’t take too much extra time, but consider looking at your family budget and the impact an extra 2% or 3% rise in interest rates would have on your loan costs.
Ask your broker, your banker questions like;
- What would my repayments be in 6 months time if the rates went up 1% or $2%. Then ask them to scenario plan the repayments for a period in 12months and or 18mnths and 2 to 5 years.
What you are trying to work out is… can I handle (budget for) an increase in loan rates? And, how much of an increase can I cope with? And, over what period of time? Also consider that your loan should be reducing over the time as well.
And It’s not Just about Loan Costs…
You should also consider the impacts on your household budget from an income perspective; questions like;
- Will I (we) earn more money through a job change, promotion or pay rise, or
- Will my bonuses keep coming, or disappear?
- Will my partner stop working because of a new baby, and therefore we will have less money and more costs?
In the past home lenders and borrowers generally borrowed an amount that meant about 25-30% of their after tax household income went on loan repayments. And many people were able to pay off loans within 7yrs because they paid extra repayments. Nowadays people are borrowing money that soaks up, in some cases, up to 40% of their income, which doesn’t leave much room for sudden increases in rate changes.
It’s important for new borrowers, and existing borrowers to regularly review their loan options, and their household budget spending. There are many online calculators and budget tools that you can use, or you should contact your broker if you need to review or update your budget plans. And, therefore you’re your loan selection.