Fixing your mortgage rates now could beat the banks
How likely is an interest rate hike in 2017?
One in five Aussies would be under housing stress if interest rates go up just 0.5 per cent.
1. RBA, EH?
Australia’s official rates are at record lows. One and a half per cent! Nobody’s ever seen that before.
It’s not concrete evidence by itself, but when rates get this extreme, it is more likely they’re eventually going to head back to a normal level, rather than stay out in the wild and unforeseen country they are in right now.
(This would not be true if the economy was completely kaput — they’d keep cutting rates. But the economy is only partly kaput — NSW is actually going quite well, with unemployment at 4.9 per cent. Sydney in particular is in fine fettle. If that continues and even spreads, rates will only go up.)
2. THE NAME’S BOND
Bonds are just money borrowed and lent by things other than banks — governments and companies, etc. We can learn a bit by looking at the rates on them (called yields). Often, bond interest yields show us what people think official rates will do next.
Their long and somewhat cataclysmic decline echoed falls in official rates. But they have been surging upwards in recent times, as the next graph shows.
See that little uptick? Interest rates could do that too.
3. BANKS PLOTTING AND SCHEMING
Maybe you reckon foreign bond markets don’t tell us much about Australian interest rates. Fair enough. How about Aussie banks? They have a front-row seat to the circus. In fact, scratch that — they are the ones whose heads are inside the lion’s mouth.
And they are showing signs that interest rates will be higher soon.
If you look at the fixed interest rates they charge customers, you’ll notice something interesting. After a long period of falling, they’ve ticked up just recently, as this next graph shows.
Most Australians take variable rate mortgages, but fixed interest rates are different. They lock in the rate on the day you sign the mortgage (often for three years). When the rates go up, it can be a sign that banks reckon rates will be higher by the end of the period.
4. HOUSING INVESTORS
The Reserve Bank knows a rate hike could make like difficult for home borrowers. It doesn’t really want to do that. But even worse, in its eyes, would be to make life easier. It is already upset about the amount of borrowing going into investor housing.
And the most recent data on borrowing shows housing investors are getting pretty confident again, as the next graph shows.
Investors are confident, so you wouldn’t want to make them more so by dropping rates, would you?
A rate cut would only make it easier for the kind of people that amass portfolios of property and heaps of debt. The RBA wants to keep that kind of thing at bar for now, so a rate cut looks unlikely.
So that’s four signs that all seem to hint rates are going up. Is it a done deal? Nope. Because of this fifth fact.
The RBA has one job, really. To manage inflation. Right now, inflation is amazingly low. Too low, really, for comfort.
The consumer price index went below zero in one three-month period last year, which was somewhat of a shock. This next graph shows the annual pace of change, and it has fallen well below the two-to-three per cent range the RBA aims at.
Inflation has been frighteningly low for a while now.
This is a clear sign rates shouldn’t go up. Raising rates is what you do when inflation gets too high. (The reason: higher rates should lead to more saving and less spending, in turn causing businesses to not put up prices. They should also lead to less borrowing which should also lead to less spending, also causing businesses to not put up prices.)
So long as inflation is limp and low, rate rises are going to be very tricky for the RBA. That is why inflation is going to be the number one thing to watch in 2017.