Expert Advice with Philippe Brach 18/12/2015
It’s the million-dollar question, isn’t it?
Perhaps it’s not quite worth that much, but the question of where interest rates are headed in 2016
has certainly crossed every property owner’s mind.
This is perhaps driven by the confusion we experienced in 2015, when we went from what most considered a stable interest rate environment, to a volatile mortgage season
of shifting rates, terms and conditions.
Investors are now paying up to half a per cent more than they were six months ago (even though the official cash rate hasn’t moved), and investment loans are becoming harder to secure.
Overall, it’s an uncertain time and at Multifocus Properties & Finance, we’ve certainly noticed an increase in enquiries from clients who are wondering what they should do next. They want to know:
Are interest rates going to increase in the next year?
Should I fix my rates now to avoid getting stung by further increases?
Or is my mortgage likely to fall again in 2016?
While I have no definitive answers for you, I do have my thoughts on the subject.
Managing your mortgage in 2016: will rates rise or fall?
It obviously helps to be able to budget and make investment and financial plans, if you know how much your mortgage is going to cost you over the year ahead.
The good news?
I believe the Reserve Bank will reduce interest rates in 2016.
Reserve Bank Governor Glenn Stevens virtually said as much at the RBA’s December board meeting, when he commented
“The Board again judged that the prospects for an improvement in economic conditions had firmed a little over recent months and that leaving the cash rate unchanged was appropriate. Members also observed that the outlook for inflation may afford scope for further easing of policy
, should that be appropriate.”
Whether it’s one rate cut or two, we’re likely to see the cash rate come down.
The bad news?
Just because the Reserve Bank decreases the cash rate that doesn’t mean the banks will pass it on to consumers. Their behaviour in recent months
has proven that they’re ready and willing to operate to the beat of their own drum, and a 25 basis point decrease delivered by Glenn and co. could become an opportunity for them to reinforce their balance sheets, rather than reward customers.
Should you fix or stay variable?
In saying this, if you currently hold a mortgage it’s important to retain some perspective.
Most people who have a home loan right now, or who are applying for one, are paying a mortgage interest rate that begins with 4. This is half
what we were paying during the GFC, and far lower than we are accustomed to paying for our mortgages.
Consider the fact that over the last 50 years or so, mortgage interest rates have averaged around 7%. It’s generally accepted in the industry that 7% is the ‘norm’, so to have an extended period where mortgages are available in the 4.5 to 5% range is not to be taken lightly.
Some in the industry believe that interest rates will remain around their current historical lows for several years, particularly as the Australian economy continues to rebalance away from mining. Adding to this, most banks have a 5 year fixed rate between 4.5% and 5%, so it seems that banks bet that we are in for a long stretch at low levels.
This could mean fixing your interest rates to lock in rate certainty
and allow you to manage your budget effectively. It could also mean saving a little harder, to increase your cash reserves in case of another lender-led interest rate hike; or reviewing your property rents, to ensure your investment properties are returning as much profit as possible.
If you have a portfolio of properties, it seems logical to fix at least some of the loans to hedge your bets.
To create some clarity around what you’d like to achieve in 2016 and to make mortgage decisions that best suit your needs, feel free to contact our experienced team for an obligation-free conversation! Call us on 1300 266 350 or click here to contact us.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property