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Time to fix?

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by Peter Switzer

The combined actions of the Reserve Bank (RBA) and the Commonwealth Bank (CBA) on Cup Day is bound to rock the housing sector and if there’s a housing bubble — and there’s not! — then these surprise rises will prick it big time.

The newspapers always talk about the average home loan slug on a $300,000 loan, and CBA's rate rise yesterday will increase it by $88 a month. But lots of Aussies have $500,000 loans, given our house prices and these people will lose about $147 a month! That’s big bickies for many and will hurt Christmas plans as well as rock retailers in particular.

Shopping around

The desire to switch loans will build with disgruntled customers and so mortgage brokers, credit unions and building societies will have new potential customers.

After writing this column, I will do a spot for Today Tonight and these guys want to talk about how someone can find a lower-priced mortgage and clearly one suggestion I will say will be: “Talk to few trustworthy mortgage brokers”.

I find the people who run these current affair type programs have a good sense of what the average Aussie is thinking. That’s why their viewer numbers are so high.

Other businesses set to do OK today will be interest rate comparison websites such as RateCity. I’ve done a quick check and the best three-year fixed rate product was around 6.98 per cent.

Think before you fix

Of course the fixers will start to come out of the woodwork, however note these warnings about fixing before you jump in:

Fixers often get it wrong.
There are break costs.
Generally you can’t pay off your mortgage quicker.

However, this is the time to search for the best fixed rates if you won’t be able to cope with rates over eight per cent, which I think aren’t too far away.

Rates to rise 1% in 2011?

Economist Stephen Roberts from Nomura thinks we will see two more rises between now and the end of the March quarter. He’s one out of four economists out of 22 surveyed by Sky News Business Channel that tipped the rise on Cup Day.

Most economists think rates will go up by one per cent over 2011 and while I don’t think banks will add any more to the RBA’s rises after this round, the general public will have serious doubts about future rate rises.

As an economist I think the combined whack of these interest rate rises plus the contractionary effect of the rising Aussie dollar will slow the Oz economy down. This might mean we will see less rate rises over 2011 but, either way you look at it, the home loan game just got tougher.

The X-factor

One last warning is required and it links to fixers often getting it wrong. If the global economy is rocked by a China slowdown, another financial crisis or even a war then interest rates could be quickly cut. I don’t expect these terrible events to happen but X-factors are, by their very nature, very hard to predict.

If the world economy and financial markets get progressively better, then interest rates could steadily go higher. I don’t think they will see 10 per cent levels but nine per cent is a chance. This is the gamble fixers take, and so I wish you luck with your decision.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, November 03, 2010