Finance Market Update - 17 January 20
In our first update for the new year and new decade we will be looking at interest rates. Why they are low, what this means for you, how to take advantage of them and when it might change.
The world over has never had interest rates so low.
One of the key reasons why rates are so low is that central banks, the institutions that print money for a country, have been chasing growth through monetary policy (i.e. raising or lowering the cash rate, which influences borrowing costs).
Growth has been the dominant focus for all governments and countries since WW2 75 years ago.
We’ve talked before about how the RBA is trying to change your mind and get you to borrow and spend more with the allure of lower rates. The reason they want you to spend more, whether on borrowed money or cash, is because on persons spending is another person’s income, and the more income people receive, the thinking goes that they will in turn spend more, which boosts economic activity and ultimately growth.
This is why our central bank, The Reserve Bank of Australia (RBA) and effectively all others from developed nations have record low, or negative interest rates – they are all trying to get the economy to grow and/or avoid a great recession.
All of this has not been seen before. Take negative rates for example. Textbooks have been rewritten to include the term “negative interest rates” because a few years ago people couldn’t conceive of such an economic situation. Now they are being talked about as if they are the logical next step in policy. Critics call this crazy.
So, our countries bankers are trying to grow the economy which is why rates are low.
Generally speaking, what a low rate environment means is that it is easier and cheaper to borrow money.
From a central bank perspective what they want to see you spending on consumption, whether that is borrowed money or cold hard cash, they want you handing it over to another person so there is more economic activity which they hope will lead to growth.
It is being argued that central banks ultra-low rates that is spurring on risky investment decisions and causing bubbles in certain asset classes, time will tell.
Either way low interest rates are good for borrowers like you and us, who have a mortgage or other debt. It means the interest paid and overall cost will be lower.
Who doesn’t want it to cost less to borrow and buy more?
Compared to a few decades ago interest rates in Australia for a home loan were just under 20%! Right now, we are securing home loans at rates of 2.9% or lower for our clients. That is a fraction of previous historical costs.
So how do you take advantage of low rates? You take advantage in a low rate environment by conducting financing activity - refinance, invest or upgrade.
If your home loan is over 3% let’s talk about what options are out there for you.
For business there has never been more options for funding. From traditional banks to online fintech lenders the types of funding and lenders is diverse and accessible.
We often have discussions with clients about obtaining business finance without using the family home. There are quite a few considerations with this discussion, but it is entirely possible depending on the circumstances.
Rates will stay low for a prolonged period. Probably a few years from now. So, it is a good time to take advantage if you have capacity.
But remember, when rates go up, so do repayments and costs. We always talk to clients about this to pre-empt any changes which can really help when inevitably they rise.
In the case of rates, what goes down, must eventually, go up.