Don’t bank on home loan interest rates staying where they are

Mortgage interest rates are now below 2 per cent and our Reserve Bank says they will stay. But Anthony Keane argues this can’t last forever.

Creating money from thin air has become a popular magic trick and it’s impacting your home, mortgage and interest rates.

The Reserve Bank of Australia is doing it – along with other central banks – in a process called quantitative easing (QE), which is banker-speak for printing money.

Want to prop up the economy, encourage consumer spending and help exporters by stopping the Aussie dollar from rising? Abracadabra! Here’s an extra $100 billion!

QE involves creating money electronically then buying government bonds in a complex process, and its use combined with ultra-low interest rates is affecting us all.

And when the RBA said last week its official interest rate of 0.1 per cent wouldn’t start rising until at least 2024, wires in my head started sizzling.

But then experience set in, in particular my many experiences over the past decade about interest rates never doing what the smart money says they will do.

I reckon rates have little chance of staying so low until 2024, because of several warning signs.

FEELING HOT, HOT, HOT

Home values impressed everyone by remaining solid during 2020, and now we have prices rising simultaneously in every capital city and rising concerns that it may overheat.

If people feel wealthier and the economy grows strongly because of a property boom, the RBA will be forced to consider higher interest rates to slow things down to avoid a bust.

Creating cash may seem like magic, but it’s a complex process that results in cheaper money.

Share markets are also climbing as ultra-low rates prompt investors to pile into stocks paying dividends rather than rely on bank deposits paying nothing.

The RBA traditionally used interest rates to try to keep consumer price inflation between 2-3 per cent, and more recently signalled it also wants them to support employment and wages growth.

It’s had no luck with inflation – which currently sits at 0.9 per cent – but its 0.1 cash rate shrinks loan and deposit interest rates and inflates asset prices for shares and property.

Creating money from nothing using QE also keeps borrowing costs low and increases the chances of consumer and investor confidence causing rate rises earlier than expected.

WHAT YOU CAN DO

Grab your magic wand, put on your shiny top hat and take advantage of the situation.

Pay as much as you can off your mortgage, because every extra repayment reduces the interest component of your next repayment.

Seek a better deal on your home loan. If you haven’t checked or negotiated a mortgage in the last year or so, you’re probably paying too much. Fierce competition among lenders puts many borrowers in a powerful position.

If you’re thinking about buying property, don’t wait too long. Home loan rates can’t really go lower and all this cheap and easy money combined with vaccine-related confidence could push prices up quickly.

Avoid borrowing the maximum allowed. Aussies love to dream big with their housing, but a mortgage at your absolute limit leaves no wiggle room when rates eventually rise.

I believe we will have low interest rates for many years, but I’m not convinced they will stay at their current level until 2024 as those wizards at the RBA suggest.

@keanemoney