Interest rates and crystal balls

2 minute read

As we all know, interest rates rose again for the 12th time and many of the banks are expected to increase rates even more than the 25 base points increase in the official cash rate announced by the Reserve Bank.

Its interesting to note that the reason many banks have and are considering again to increase their rates above the official cash rate has been blamed on the cost of wholesale funds, primarily from the states. I guess nobody at the banks wants to point out at that over the past couple of days the mortgage rates in the US have dropped dramatically from the insane levels of just last month and are expected to drop even further over coming months.

Many commentators have interpreted the RBA announcement as much softer than previous announcements and implying that the strategy of lifting interest rates is working as they had hoped. Read into this what you want I suppose…

With the Government looking at switching costs at the moment fixed loans may become more popular. It seems that journalists would rather focus on increasing mortgagee sales, interest rates spiralling out of control or one of countless other doom and gloom stories. The easy availability of fixed interest loans allow buyers the security of knowing that repayments will not change over a 3 to 5 years or even longer period. Many home owners look at upgrading their homes every 3 to 5 years anyway so for many it is possible to insulate themselves from rate rises and have the same payments every month they live in the home.

So what is everyone else’s opinion on what will happen with interest rates for 2008? Will we have the 13th, 14th etc consecutive rises? Will interest rates spiral out of control by year end or will they hold steady? Or will someone be brave enough to predict a drop sometime this year?

For what its worth and to kick it off, here is my prediction… We will not get an interest rates rise next announcement and throughout the rest of the year we will see it hold fairly steady with occasional rises only.

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  • Greg Vincent
    Posted March 5, 2008 at 8:33 pm 0Likes

    Glen my real concern is that the more the reserve bank raises interest rates the more our overall credit card debt will increase. In many cases more than 50% of gross income is going out to pay the mortgage & after paying tax at around 40 odd cents in the dollar there’s not much left, so as the reserve bank lifts rates it actually increases credit card spending, which is causing a never ending spiral.

    I don’t want to scare you but the consequences of a 9% interest rate are equivalent to 18%. Back in the 80’s we saw rates go from 12% to 18% (50% increase) now they have gone from 6% to 9% (same 50% increase) but this time with much higher borrowings.
    Back in the late 80’s they could only lend you 27% of gross earnings – this was increased to 30% – Today they lend out to something like 40 – 50% of your gross income.

    I’ve looked into a number of ways that people may be able to save their home. One radical way I found that may work is that apparently you can rent your home out for 5 years capital gains tax free and negative gear the repayments and if you want to extend the period you only have to move in for a short period and then I think you can get an extension of another 5 years.
    I did a lot of work on it a year or so back and even thought that neighbours could even swap houses & rent from each other. May sound a bit crazy but in the long term – especially if the home owners could move back in with family it seemed to work out really well. Not sure if this still applies today?
    Note: I am no financial advisor & you’d need to do your research and check this out for yourself.

    I just hope the reserve bank pull their head in and stop increasing rates before they send us into a recession. Our commodities boom will slow shortly as China’s hunger for steel should reduce once they have finished off all its projects for the Beijing Olympics over the next few months.
    BTW No wonder they wanted our steel – Have you seen the Birds Nest stadium they’ve built?

  • Nick
    Posted March 6, 2008 at 1:05 am 0Likes

    I had little joy with my accountant when we sold an our unit. Apparently, if you rent a property out, particularly if you’re claiming against it, it is an investment and subject to cgt. Regardless of you then moving back in. Your still obligated to pay capital gains tax on any appreciation that occured during the period it was rented.

    That said… with the current interest rates, I would say capital growth is going to be pretty lean for the next few years, you could probably offset any growth with a half-decent depreciation schedule.

    The only problem I’ve found with fixed rates is you can’t use them as a line-of-credit, which is what I’m accustomed to. However I found CBA have a new high-interest account on offer (if you ask them for it), at 6.5%, no minimum balance and zero fees. Before tax, that’s almost 80% offset, on a fixed loan, so not too bad… better than being at the mercy of the RBA anyway.

  • Greg Vincent
    Posted March 6, 2008 at 10:02 am 0Likes

    Nick, I agree CGT was unlikely to apply for a while.
    The other thought is that over in Japan they had to generate 100 year home loans (3rd generation loans) because the house prices were so expensive.
    If the banks offered a longer term but had to get back to a 30% of gross wage scenario I wonder if that would help. By holding the percentage at 30% it would restrict the idea of increasing the borrowing capacity & igniting an unsustainable boom.
    Or perhaps they could offer an interest only option on mortgages for a period of 2-3 years to allow people to get back on their feet – Bad debts aren’t good for the economy – banks or mortgage insurances companies included.
    If they could re-structure products it might help hold it all together.

  • Dave Platter
    Posted March 8, 2008 at 1:46 pm 0Likes

    This is probably a stupid question, but as a relatively new-to-Australian, let me ask it anyway. Does anyone know what it is about the financial markets in Australia that prevent banks from offering 30-year mortgages in which the rate is fixed for the entire lifetime of the loan?

    That’s a very popular product in the US because it gives homebuyers a bit of certainty. No matter what rates do during the next 30 years, they know exactly what their mortgage payment will be.

    Thanks for any illumination any one can provide.

  • daytona beach fl remax
    Posted March 10, 2008 at 11:55 pm 0Likes

    I believe they will cut them one more time this month and then they will begin to rise and by 2009 we will look back at early 2008 as the best interest rates in years and best priced homes on the market.

  • Nick
    Posted March 12, 2008 at 12:56 pm 0Likes

    Just guessing Dave… but perhaps it’s our smaller economy and floating dollar? Banks don’t have enough money to cover domestic loans without having to offset this against their own borrowings in international wholesale money markets, which are subject to dollar fluctuations over time?

  • Liem Nguyen
    Posted March 27, 2008 at 2:36 pm 0Likes

    Hi Glen,

    Your are correct on the CGT exemption however the current time period is 6yrs. This means if you rent it out for less than 6yrs and move back in for a certain period (generally more 3months) and then rent it out again for another cycle of 6 yrs and will be be CGT exempted. The information is on the ATO website.

    Having said that, most of my Sydney properties in the western suburbs have gone backwards so CGT is not current concern? haha


  • Glenn Batten
    Posted March 28, 2008 at 5:00 pm 0Likes

    We had a very quiet week after the announcement but as soon as the market commentators all started to agree that the interest rate hikes appear to be at an end the market took off full steam ahead again. In fact the last 3 weeks have been that good our month will still be higher than normal.

    How has the last few weeks been elsewhere around the country?

  • Nick
    Posted March 29, 2008 at 10:38 pm 0Likes

    WTF?! Remind me to fire my accountant. Liem, do you know, is that new legislation?

  • snoop
    Posted March 31, 2008 at 8:30 am 0Likes

    Re the fixed 30 year mtge…wldnt it be great
    Its greed Dave from our local banks and of course the banks in the US have Fannie and Freddie to back them up.

  • Greg Vincent
    Posted March 31, 2008 at 5:57 pm 0Likes

    Nick, don’t sack the accountant just yet, I found out that it might not be quite as easy as it sounds. The real grey area to this loophole is the part where they have identified the reasons for moving as shown in the following link.

    Not sure how long it’s been around for but I’m pretty sure it’s been available for quite a few years.

  • scott
    Posted April 1, 2008 at 8:25 pm 0Likes

    I thought the legislation said that you can only have one principle place of residence (PPR) at any time and that this residence is exempt from CGT. This would mean that if you were taking a long holiday, working overseas etc then you would not have any PPR in Australia so you could apply your PPR CGT exemption to the property you used to live in but have now moved out of. I didn’t think it applied in the situation were you move out of your house and start renting another one (as now the place you are renting would be your PPR).

    In any case it is clear that you can only claim CGT relief on one property at any time . So if you move out and rent out your property – you must also rent – you cannot also own the new property you move into.

    Also, be careful with the “benefits” of depreciation deductions. If you claim $50k of depreciation on a $500k property, your cost base for CGT purposes will be $450k ($500k-$50k) – ie you are really just getting a timing advantage by saving tax now but paying more tax when you sell (albeit with 50% reduction if you hold it for >12 months).

    Like others – I’m not an accountant so check it out for yourself..

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