Predicting the unpredictable

21 January 2016

Domain SMH, The Age, Brisbane Times, Canberra Times, WA Today

Jalil Wakim– Lendfin

The start of the new year often prompts consideration of one’s finances.

With more than a third of Australians paying off a mortgage, interest costs are likely to factor strongly in the household budgeting of many Australians.

Deciding whether to fix rates, increase repayments, or shop around for a new loan product can be confusing. Some Australians might be wondering whether to invest further, or even divest, while others might be considering taking the plunge and entering the property market for the first time. All of these scenarios require consideration of how interest rate movements might affect the cost of owning property.

So what will the interest rates do in 2016?

Of course no one can ever truly predict what the Reserve Bank will do with rates at any point. However, it is my opinion rates are unlikely to move until roughly the end of the first quarter. This is because the data used to make the rate decision can be somewhat skewed during the Christmas period, due to a rush to finalise sales before the holidays, and because many data-collection agencies close over the break.

When rates do move,however, I believe there is a 50 50 chance between increasing or decreasing.

Because the property market has showed signs of cooling in recent months, and other economic data has been somewhat weak, there’s no overwhelming case for increasing rates.But as this cooling comes off the back of an extended period of strong growth, there’s no overwhelming case for decreasing rates, either. Either way, I believe the change this year will likely be small.

An interest rate rise or cut isn’t a guarantee banks will follow suit. Larger banks have greater overhead costs, so are often more inclined to increase rates in line with the Reserve Bank to cover these. They also tend to follow one another.

Smaller banks and lenders, on the other hand, have far lower overheads, so are more capable of passing on rate cuts-although this isn’t guaranteed, either. Because interest rates are unlikely to rise or fall by any substantial amount in 2016, I’d recommend focusing instead on reducing debt levels while rates are still relatively low. Doing so will mean you’re less likely to be affected by rate changes, anyway, and might put you in a position to use the equity in your property to buy another one down the track.

Considering the unlikelihood of a huge increase in rates, you should generally only worry about fixing rates if your aim is for certainty in budgeting. If this is the case,consider talking to your broker or bank to organise a two- to three-year fixed term so your mortgage repayments will be predictable during this period.

If you are intending to buy a home in 2016, remember there’s no “right time”to buy. If you want to buy and can comfortably do so within your budget, you should take the plunge. The housing market  is unlikely to drop any time soon- in fact, it’s likely that a property you purchase today will be worth the same or substantially more down the track, so there really is no better time to buy than now. In the end, however, everyone’s situation is different. It might be worthwhile contacting your bank or broker to discuss your options.

Jalil is founding director of finance broker Lendfin.