Our preoccupation with Interest Rates

Interest Rates

 

I’m not sure about you, but sometimes all the media talk and focus on the ups and downs of interest rates seems like such a waste of time and energy to me.

Sure, I like to know what I’m paying for borrowing money, but the reality is that I can’t change the level of our interest rates, so if I want to borrow money at any given time, well then, it is what it is.  I have to pay the market rate – mind you, the best offered market rate product that I can find – but the market rate nevertheless.

The thing I find perplexing is when I hear people saying that they want to invest in property, but they’ve heard that interest rates are going to go up.  Technically, they are correct.  Interest rates will go up.  If you have a mortgage over a period of time, you will no doubt find that interest rates will go up….and they’ll go down….and they’ll go up….and they’ll go down….you get the idea, right?  Interest rates are cyclical.

What affects interest rates?

The Federal Reserve Bank of Australia (RBA) are charged with monitoring and maintaining the stability of our overall economy and they do this by responding to the ups and downs of the countries economy with adjustments in interest rates.  It’s a bit of a balancing act as they try to prevent rapid growth leading to rising inflation and price growth and on the flip side, they try to ‘speed up’ the economy when it’s slow to ensure reasonable employment rates and keep people buying.  So in very general terms, balancing interest rates is about inflation and employment.

If we think of the economy as a see-saw with inflation at one end and recession at the other end, the RBA are the little bloke in the middle who is edging a bit toward one end then back toward the other to keep the see-saw balanced!

It’s about supply and demand.  An increasing demand for credit will see inflation start to go up and interest rates will be raised, whilst a decrease in the demand for credit will see the economy slow and interest rates will be lowered to get it going again!

Global economic conditions can also have an impact on our own economy, as we have seen of recent times with the ‘Global Financial Crisis’ (GFC), or the ‘KFC’ as I like to affectionately refer to it!  I’d much rather think of fried chicken than the fried economy!

Governments don’t directly decide on interest rates.  The way they handle monetary decisions can impact upon the economy of the nation, however, which can influence interest rate decisions.  This is why you will hear people talk about how interest rates went up under a [insert Liberal or Labor] government – you’ll particularly hear that around election times!

 So what can I do about interest rates?

You can know what they are and factor these into your purchase decisions.  

I would always recommend when you are ‘running the numbers’ on a property deal that you use interest rates that are at least 1-2% higher than the current rate.  This will mean you know when interest rates rise, and they probably will at some point, that you are comfortable with your repayments.

You can shop around for the best deal when you are looking to buy a property.

Remember that you are in charge of the mortgage that you get.  Assess the options, compare rates at different banks/lenders, negotiate a better deal.  Don’t worry about ‘bank loyalty’ – trust me, banks don’t worry that much about yours, even if you’ve banked with one bank all of your life, this should not be a factor in your mortgage decision.

You can approach your existing bank for a better deal, or move banks for a better deal.

Here’s a great tip.  Pick up the phone and speak with your bank about what sort of a great deal they can offer you on your current loans.  Tell them you really want to make sure you are getting the best deal so you are doing some assessment of your current loans and interest rates.

Recent legislation meant that banks had to remove their exorbitant exit fees, making it easier for you to move your existing loans.  Do make sure though that you fully assess all fees and charges associated with exiting one loan (if your loan was setup before the recent no exit fee legislation then it may still have fees) and all of the fees associated with setting up a new loan.

Don’t worry about ‘what they say’!

Educating yourself is the key to not having to worry about ‘what they say’.  When I hear people talking about how they’re not going to invest because interest rates are going up, mostly, I just smile and nod.  I am comfortable enough with my investing knowledge that I don’t need to be preoccupied with minor interest rate fluctuations and the opinions of other people (who mostly, don’t even have property investments).

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