How low could rates go?

Herald Sun - Property - - OPINION -

LAST week we saw the Re­serve Bank slash bank rates at a time when many, in­clud­ing me, thought we were at the low­est point; es­pe­cially af­ter a long pe­riod of zero move­ment.

I am cer­tainly no fi­nan­cial ex­pert, my ex­per­tise is based on noth­ing more than be­ing a typ­i­cal home­buyer and seller and be­ing sur­rounded by the world of real es­tate day to day, but this begs the ques­tion — what­ever next?

I heard some com­men­ta­tors even say we could head to­wards a zero rate.

Of course, ac­tual home loan rates sit above this quoted cash rate but, re­ally, could rates ac­tu­ally get any lower for our home loans?

It was only a few years ago se­cur­ing a rate of 4.99 per cent was an achieve­ment that would have cost $2080 on an in­tere­stonly pay­ment per month for a $500,000 loan.

That same loan at the low­est rate I found on­line to­day, which was 3.69 per cent, makes the monthly pay­ment $1538 on the same $500,000.

Of course, for most ar­eas of Aus­tralia, since that higher rate, house prices have risen and the $500,000 loan doesn’t buy what it did, how­ever this is part of the rea­son house prices have had the chance to rise, even with very lit­tle in­fla­tion or in­crease in typ­i­cal wage rates.

This also can ex­plain the in­crease in the smaller lot sizes, an ap­pre­ci­a­tion of units/ town­houses and other more com­pact liv­ing al­ter­na­tives.

Gen­er­ally though, house prices have risen, mean­ing buy­ers are forced to lower their ex­pec­ta­tions of what they ac­cept is a suit­able buy.

Dur­ing my home own­ing decades, al­low­ing for the in­evitable ups and downs, the gen­eral pat­tern has been down­wards. In 1986, when I bought my first home a typ­i­cal av­er­age vari­able home rate was at 15.5 per cent.

By 1996, they were slashed to typ­i­cally 9.25 per cent; a decade later down to 7.3 per cent; and now the typ­i­cal rate is 5.35 per cent, with so much com­pe­ti­tion many are able to se­cure loans for less than 4 per cent.

So what are the signs for the next decade? If this is where you are ex­pect­ing me to re­veal some ed­u­cated in­sight, based on highly re­searched and in­sider data, I am about to dis­ap­point. What I have ob­served over the years is that if I can sense im­pend­ing doom, peo­ple in power have likely con­sid­ered this be­fore I have.

With com­mon home loan rates around 4 per cent, if rates in­creased over a short pe­riod of time by only 1 per cent over­all, that hits home­own­ers re­pay­ments by 25 per cent; a rather sober­ing thought. If the gov­ern­ment al­lowed an econ­omy that gen­er­ated sub­stan­tial and quick rate rises, the whole econ­omy would be hit very hard and, in gen­eral, our dear MPs, their fam­ily and friends all own prop­erty — I feel it won’t hap­pen.

I am a huge ad­vo­cate of fix­ing rates if the signs are right, it gives you peace of mind, a way to bud­get and take con­trol of your fi­nances. True you can lose out, but you can win, too, and as long as it is a well­re­searched “fix” and it works for you, that cer­tainty can be in­valu­able.

Is it con­ceiv­able rates will go lower? Maybe, but with rates around or un­der 4 per cent, fix­ing and plan­ning long term could be worth con­sid­er­ing.

My ad­vice is to not al­low this rate to lure you into a false sense of se­cu­rity. Don’t think it’s just an op­por­tu­nity to bor­row more than you would nor­mally be com­fort­able with.

We have the low­est cash rate in his­tory right now. In my opin­ion, there is a chance it will linger around this level for a year or two. If it re­duces fur­ther, the mar­ket will con­tinue al­most as it is now, in busi­ness-as-usual mode, but the first rate in­crease may cause real panic.

That is why I sug­gest keep­ing af­ford­abil­ity in mind and ex­pect­ing and al­low­ing for some rate in­crease along the way.

An­drew Win­ter is host of on Life­style

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