Interest Rate Rises Coming
Ross Greenwood: The Headline – Eight Interest Rate rises in the next two years – should shock many people with big mortgages.
And its designed to do exactly that.
The man making the prediction is one of Australia’s best economic thinkers – Dr John Edwards, former chief economic adviser to Paul Keating as treasurer and Prime Minister; former chief economist of HSBC Australia and on the Reserve Bank Board until last year.
He’s no slouch.
But you’d do best to read his essay for the Lowy Institute before jumping to too many conclusions.
Because John Edwards is stating the bleeding obvious. Official RBA rates are not at emergency record lows of 1.5 percent.
But if the economy starts behaving normally – and the Reserve Bank forecasts suggests it might start doing that over the next couple of years – then rates will also inevitably rise back to normal settings.
Eight rate rises in 2017/8 and 2019…would take the cash rate back to 3.5 percent.
So a mortgage you’re now paying 4.5 percent for would rise to 6.5 percent or so.
More like normal.
So say you have a $500,000 loan over 25 years at 4.5 percent…its not costing you $2,779 a month.
If Edwards is right…and the rate goes to 6.5…you’ll pay $3,376 a month – $600 a month more…$7,200 a year.
Now there’s a few things you can do about this…if you think its right.
You could take out a fixed rate loan.
Problem is you’ll end up paying more today …trying to protect yourself against paying more tomorrow.
A new home buyer…I think…should be doing exactly this with a big chunk of their loan.
The other thing – and many already do it – is pay off your loan as though rates are already 7 percent plus … In other words get yourself used to the pain. If the rates move higher; you’re already there.
Now, John Edwards is conscious that many households have taken on substantial debt.
And he says, quite rightly, that if rate rises drag on households – and the economy – the RBA would slow the rate rises.
But meantime be prepared. You have been warned.
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