Every economy has cycles and we may be approaching the end of one that has been good for mortgage holders.
For more than two years the cash rate – the benchmark for variable mortgage rates – has been falling, from November 2010 when it was 4.75 per cent, to the current 3.0 per cent.
This past week, the RBA held the cash rate at 3.0 per cent and the markets are expecting the local and global economy to pick up slightly which will keep rates steady and perhaps bring some rate rises before the end of this year.
I don’t follow market expectations too religiously, but you get the idea: 3.0 per cent is as low as we’ll probably get this time around.
While the economy has been finding its feet, another factor has emerged. The banks’ cost of sourcing funds from the capital markets has eased.
This is an interesting confluence of forces, because it means as the cash rate rises, it may not hurt mortgage borrowers as much as it should; and with funds relatively available from wholesale sources, the banks won’t have to offer premium yields on cash deposits in order to attract those funds.
Regardless of how this plays out, rising interest rates affect people in different ways.
Firstly, people relying on cash investments should be shopping for institutions that stay in step with cash rate rises.
This is crucial, because with a resurgent economy also comes inflation, and rising inflation is the enemy of cash investors.
Those who need to retain cash as their core investment should keep their money in the best-yielding term deposits and cash accounts, while also looking at bonds and dividend yielding (conservative) shares as a way of keeping their risk low and returns relatively high.
Simply sticking to ‘safe’ cash ignores the danger that inflation takes your gains.
Secondly, if interest rates rise this year, but bank funding costs also ease, this year mortgage borrowers should be alive to the prospect of refinancing.
There’s already a daily spread of around one per cent between variable rate mortgages, which represents a difference on a $250,000 loan of around $140 per month.
As cheaper funding comes back into the Australian lending system while mortgage rates rise, this spread between lenders will probably become wider as lenders position themselves for market share and the incumbents try to stop inroads into their
customers. Stay open to deals.
Thirdly, if we do see a couple of rate rises later in the year, business borrowers must stay vigilant about their interest rates and loan security.
It can be difficult researching how much you should pay for business credit, because all sorts of deals are done that mean you can’t always compare apples with apples.
One way to ensure you’re not paying too much is to use a finance broker who stands in the market for you and who knows what other business owners are paying.
Lastly, remember this: you can’t beat the cycle, but by staying informed and being prepared to act, you can profit from it.
* Mark Bouris is the Executive Chairman of Yellow Brick Road, a financial services company offering home loans, financial planning, accounting & tax and insurance. Email Mark on mark.neos@ybr.com.au with any queries you may have or check www.ybr.com.au for your nearest branch.