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Rate gazing for 2015

 In Buying my first home, Finance Help, Investing in property, News, Refinancing my home loan

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After 18 months of record low interest rates, many Australians are wondering what’s in store for 2015. With the official cash rate so low, is it a case of what goes down, must go up? Or can we expect the interest savings to continue into the year?

While even the best financial analysts don’t have a crystal ball on how the Reserve Bank of Australia (RBA) board will cast its vote on our official cash rate when it meets, the answers to the above for 2015 may well be yes and yes. That’s because economic factors such as a weaker Australian dollar, strong housing investment and increased consumer spending, have not only made it difficult for the RBA to justify another rate drop but have probably prompted upward movement in 2015. The good news is that any increase is likely to be gradual, giving borrowers the benefit of low interest rates for a little longer, plus time to plan and adjust.

What influences interest rates?

The aim of the RBA, when deciding what to do with the official cash rate, is to help ensure we have a sustainable and stable economy. This provides a climate for prosperity and high employment. The official cash rate, which ultimately influences the interest rates financial institutions charge on loans, is basically the RBA’s lever to control inflation. A number of factors can influence the RBA’s decisions, including what’s happening on financial fronts at home and around the world.

Global economy

Generally, the RBA will review what’s happening amid the larger economic powers – United States, China and Europe – to ensure we’re remaining competitive in the global marketplace. The RBA will also look at the strength of the Australian dollar and the price of and demand for our resources such as coal and iron ore.

If our trading partners are performing strongly and there’s increasing demand for our resources, which then helps boost our economy, the RBA may see a need to increase interest rates to quell inflation and prevent our economy from over-heating. Conversely, if global demand for our resources is low and funds are not being injected into our economy, the official rate might be cut to help stimulate spending.

Our economy

Local factors also heavily influence interest rate movements. The unemployment rate, house prices, new housing figures, business investment and exports are some of the lead indicators on the health of our economy and whether it needs to be stimulated or cooled down.

Stability of financial markets

A sustainable banking system is the cornerstone of a stable economy so the RBA will look at the health of our own financial institutions, including their ability to access funds and the interest rates they are charging on their loans and offering on deposits.

What’s in store?

Interestingly, as we kick off 2015 there are a number of competing factors for the RBA to weigh up. On the one hand, unemployment remains relatively low and home prices have been on the rise, along with the number of homes being built, indicating a strengthening economy. On the other, commodity prices have dipped, reducing the amount of funds flowing into our economy from our key exports. In another twist, oil is among those plummeting resources, which means consumers have more money to spend on other things once they have filled their cars, which could then help offset losses from other exports.

All of these factors have economists split on whether interest rates will go up or down in the early part of 2015. However, there is a more general consensus that at some point over the next 12 months, rates will move up, especially as the United States continues to show signs of economic recovery after several years of financial drought.

There also seems to be agreement that any rises will be gradual – probably .25 to .5 percentage points at a time, lending some predictability to the economy and giving borrowers time to adjust.

The one true known is that nobody can genuinely predict what’s in store on all of the economic fronts that contribute to the official interest rate decision. The best plan of attack is to hope for the best, while planning for the worst.

What it means for existing and new borrowers

Anyone with a mortgage should be making the most of existing low rates by paying more off their loan. Even if rates rise marginally this year, they will still be among our most affordable in decades, so now is the time to sock spare cash into your mortgage to pay it off quicker.

If you find even with rates as low as they are now that you are just making ends meet, you should consider steps to reduce your costs or increase your income (or both) to improve your ability to service the loan when interest rates inevitably rise.

Borrowers might also consider fixing their interest rates. Generally, the downside to fixing is that rates can continue to slide, leaving you paying a higher rate than those with a variable loan. The benefit of fixing is that you know exactly how much you will be paying regardless of any official rate movements. If you are just getting by at the moment, fixing your loan could help create more predictable cash flow and give you peace of mind regardless of the next official interest rate move.

Take the opportunity to talk to your broker so they can help determine the right loan structure for your circumstances and the year ahead.

Any advice contained in this article is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regard to those matters. Information in this article is correct as of the date of publication and is subject to change.

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