Interest rates have been at historic lows for an extended period of time and no one is able to accurately predict when this cycle will end and when rates will rise. Historically the Reserve Bank dictated rate adjustments but in more recent times out of cycle rate adjustments have been greeted by public outrage, however we believe this will become more the norm rather than the exception
The Royal Commission is the talk of the town and all financial sectors have been scrutinised and found wanting. It is our opinion that the fallout from the Commission will see a greater upheaval in the financial markets than what was experienced in the GFC (Global Financial Crisis) of the late nineties.
Banks are in the business of managing risk, which is their core business. In a simplistic view, they borrow funds from the public (your savings) and then in the open market lend it out at a higher rate. The difference between the cost of the funds and the rates they lend it out at is the margin in the middle; this is how Banks make profits.
The cost of the funds they borrow on the open market in intrinsically linked to their Credit Rating as determined by Standard and Poor’s (S&P). This rating may be affected by the findings and the remedial actions required from the Royal Commission reports.
The Royal Commission Findings are, and will continue to have a negative impact on banks and other financial institutions. The full extent is yet to be revealed and because of this we may see further out of cycle interest rate rises during 2019, particularly if S&P downgrade the Banks credit Ratings.
Banks also borrow significant funds from Overseas Markets and in recent times we have seen the USA Bond rates climb above our Australian bond rates, this is a rare occurrence; something that has not happened since early 2000 and the increased borrowing costs will no doubt be passed onto the consumer, below is a graph that shows the differential in 10 year Australian v US
Timing is Right
So whilst the above paints a fairly gloomy picture there are ways to hedge an up side
There are 2 reasons we believe that now (November & December 2018) is as good a time as any to fix at least part of your mortgage if not all:
- The full effect of the Royal Commission is yet to take affect and whilst there is a lot of work to be done by the banks from the interim report the final report is not due out till February 2019
- A number of banks are offering great 2 & 3 year fixed rates, as well as rebates for refinancing your loan. These are up to $2,000 (terms and conditions apply) so the costs of refinancing are covered and there may be a little left over as a bonus.
If you wish to explore your options please give us a call as the low rates and rebates have time limits for settlement so act now.