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loan and money finance

Hedge Your Bets

Well surprise, surprise, the Reserve Bank has again left interest rates on hold, an expected decision as mortgage holders again get to breathe a sigh of relief until February 2015. There are no signs on the horizon that rates will change early next year either, as we continue our record streak of low rates and stability that hasn’t been seen since the 1960’s.

In a survey involving 37 economists, a staggering 94% have predicted rates to change in 2015, with 89% of the 37 predicting the next shift will be upwards. Though no one can predict the future with any great accuracy, it seems that with sentiment at least, rates will be headed up in the not too distant future.

With the above in mind, you may ask what can you do to protect yourself? The answer is simple, take stock of what you owe the banks, have a look at how much you have been able to pay off over the past year or two, then make a plan of how much you plan to pay off in the next two to five years, and seriously consider fixing the rest.

As an example, if you owe $400,000, you have been paying $15,000 per year, you may want look at a 5 year fixed rate. The result could look like- $75,000 variable and
$325,000 fixed. With most banks, this will give you a small off-settable variable loan, with minimal exposure to shifting interest rates, plus a large protected sum of $325,000. Overall, this example with most lenders would give you the ability to clear $100,000 worth of debt in 5 years, whilst allowing you to be protected from upward rate movement.

With 5 year fixed rates still at 4.99% at most lenders, I am not sure if there has ever been a better time to consider the above, as these rates are the lowest they have been in the last 50 years.

Source article; http://thenewdaily.com.au/money/2014/12/02/confused-interest-rates-heres-deal-2015/

Reserve Bank of Australia

Interest rates – What goes down must come up.

With the current interest rate lows moving in to record territory, many first homebuyers and new entrants to the mortgage market may be in for a rude shock when interest rates move into more normal territory.

Most variable rate lending products are sitting in the high 4 to low 5% range currently, but borrowers should take stock that historic rates in a neutral economy are normally between the 6-6.7% range on a discounted variable rate.

A lot of the shrewd and more highly exposed borrowers are looking towards fixing at least a portion of their loans to look to manage the risk of increasing rates. Because even though we don’t have a crystal ball, if we model the future off historic rate movement, any fixed rate under 6% for 5 years or under 5.3% for three years over the past 50 years would have seen the customer have a win, or at the very least not have a loss.

So try to look at fixed rates in terms of where rates are headed over the fixed period as opposed to where they are now. Because rest assured, they won’t stay low for ever. There are certain rules around fixed products you need to be aware of, so any decisions should be discussed with a lending professional.

Below is a link to an article by Greg Jericho analysing the RBA’s latest decisions.


The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered and advice and relevant research carried out.  

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