The Reserve Bank of Australia (RBA) last week increased interest rates for the 13th time since April 2022.
The rate hike was inevitable. The RBA knows that Australians spend 20 per cent more in December than they do in any other month of the year. It has done too much work in the past 18 months getting inflation under control to let that work come unstuck over the Christmas period.
Although I believe the November rise was inevitable, I still expect rates to come down throughout 2024.
As I have written in the past, interest rates cycle up and down, just the same as house prices. It’s important we keep perspective; interest rates will be high for one or two years in a 10-year period, low for one or two years in a 10-year period, and normal the rest of the time. Normal being between 4 per cent and 5 per cent. Today they are sitting between 6 and 7 per cent (high).
It’s a catch-22 because interest rates will only be high when we are in a high inflation environment. Inflation drives up the value of our assets.
That’s exactly what we are seeing today. House prices were up 1 per cent again in October and are up 9 per cent since January. This is on top of rents increasing by between 6 per cent and 11 per cent depending on the capital city.
The risk of interest rates rising isn’t something we can avoid. To get ahead in life, we must take a bit of risk. What is important is that we manage and mitigate that risk where possible.
This blog is dedicated to the number one thing we can do to manage and mitigate interest rate risk: keep our banks honest.
I received a phone call Wednesday evening from a client – one day after the interest rate decision. The client rang to let me know they had just saved themselves $15,000 in interest over the coming year. (For context, this client owns their home and five investment properties).
How did they do it?
First, they called up their mortgage broker, and then they called up their bank.
The broker told them what they could expect when it came to interest rates if they shopped their business around to other lenders.
From there they got in touch with their bank and demanded a better deal. It wasn’t handed to them on a silver platter; they had to push a little, get some updated valuations, and even ask for a discharge authority to be put through to the retention team (basically, the department within the bank that can give the biggest discounts!).
The result was a 0.5 per cent saving across their whole portfolio, adding up to $15,000 per annum or just under $300 per week.
A mortgage broker or private banker should be one of the four fundamental members of your investment team. They are especially important in a high interest rate environment.
I use a mortgage broker and have done since day one. I prefer them because I find that lenders change their policies and products as often as I change my sheets. One month they will lend you on ‘interest only’ terms, the next month they want you to pay ‘principal and interest’. A good mortgage broker stays up to date with what is going on in the market and looks out for your interests.
You need to constantly stay in touch with your broker and ask them if your interest rates and loan products could be better.
There is a war going on between the banks right now. They are all fighting for a piece of the pie, and the pie is shrinking.
Loan volumes are down 21 per cent year on year; the biggest drop in more than two decades!
Commonwealth Bank (CBA) – Australia’s biggest bank – has seen its loan book shrink for the last three months in a row. CBA hasn’t been in this position since all the way back in 2004.
The banks desperately need our business. And if your bank doesn’t want your business, there’s likely a lineup of banks desperate to take their place.
The banks are still offering new customers interest rates that are 0.66 per cent cheaper than the rates they are charging their existing customers. Expect that number to come way back over the coming 12 months…
But it won’t happen for us.
