Home buyers need to get smart, says RBA chief

Philip Lowe has warned home buyers to expect rising interest rates and falling house prices.

Lowe encouraged mortgage holders to use offset accounts to build up their “financial buffers”. Picture: Kym Smith

The Reserve Bank governor has warned home buyers to expect rising interest rates and falling house prices, stressing the importance of trying to make better financial ­decisions.

“If we go in the wrong direction, it can have a major effect on our families and our welfare, perhaps for years,” Philip Lowe said at the launch of a financial literacy campaign by the Australian Securities & Investments Commission.

His remarks follow a fortnight of shocking revelations in the ­financial services royal commission, which show many customers of financial institutions have little awareness of the fees they are ­paying.

“There are very good deals out there if you look. We can all play a role in making our markets more competitive by being smart and informed in our choices,” he said.

“It is nearly eight years since the previous increase in interest rates by the RBA. This means that many borrowers have never experienced a rise in official interest rates. They have mostly experienced lower rates. At some point this will change.”

Most studies show financial literacy is abysmal. A minority of adults understands compound interest, for instance, and swaths of the population unnecessarily pay high interest on credit cards.

A 2016 OECD study of 30 advanced countries found barely more than 40 per cent of adult respondents understood whether $100 compounding at an interest rate of 2 per cent a year would grow to more or less than $110 over five years.

Dr Lowe encouraged mortgage holders to use offset accounts to build up their “financial buffers”, saying: “This makes a lot of sense.” About half of owner-occupier loans have prepayment balances of more than six months of scheduled payments, Reserve Bank data shows.

Pointing out that house prices were already falling in Sydney and Melbourne, Dr Lowe said he nevertheless expected them to rise over the long term. “There is no guarantee that your home will be worth more tomorrow than it is today. So plan accordingly,” he said.

Dr Lowe’s comments came as the Reserve Bank released the minutes from its August board meeting, which continued the ­optimistic narrative that rates would eventually rise along with inflation.

“The next move in the cash rate would more likely be an increase than a decrease,” the minutes said. “However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment of policy,” they added.

An unsuccessful challenge to Malcolm Turnbull’s leadership in Canberra yesterday appeared to reduce the chance of an interest rate increase further.

The chance of an official increase in rates before June next year dropped to 16 per cent from 20 per cent yesterday.