Money Minute – July 5 2017 ‘What’s The Best Interest Rate?”

What is the best interest rate?

The reserve bank left interest rates on hold yesterday – no surprise there.

Our dollar fell and the stockmarket took off because markets interpreted the Reserve Bank as saying better economic time might be slower coming than anticipated.

The RBA, in many ways, is stuck with interest rates. It can’t push rates up … that’ll hurt the economy. It can’t cut … because that will fuel Sydney and Melbourne house prices.

So it and the government are relying on other ways to cool housing markets … without killing the economy.

In fact it’s the banks doing the Reserve Banks’ job right now … by raising key interest rates.

Normally, when banks raise mortgage rates out of step with the RBA … all hell breaks loose from politicians.

Not this time. Because government knows the Reserve Bank is hamstrung.

The banks – with the blessing of regulators – are pushing up rates for investors – and homeowners with interest only loans. At the same time, some lenders are cutting rates for those who pay back their loans – principal and interest loans.

Take the Commonwealth Bank. (CBA:ASX) Its standard variable loan – principal and interest – is 5.22 percent. You can also negotiate a half to 0.7 percent discount … if you buy a package.

Say you borrow half a million dollars, over 25 years. The repayments are $2987 a month. Remember the rate – 5.22 percent.

Now take the commonwealth’s interest only mortgage. It’s rate: 5.77 percent – half a percent higher. Again borrow half a million dollars. The repayments are $2404 a month. So the interest only repayments are still $580 a month less.

But if the rate was the same as the P&I loans – 5.22% – it would be an extra $230 a month or so cheaper.

But remember, the person with the principal and interest loan is paying around $800 a month off the principal of their loan. The person with interest only is paying off nothing.

And its this behaviour – people with no buffer, if rates rise – that regulators, banks and government are trying to change.

Markets

Dow Jones up 129 … Dollar 76.03 US cents.

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