As borrowers we pay special attention to what rates are doing now, and how they are likely to move in the future. They affect how much we have to pay back to the bank for (probably) the biggest purchase we will ever make – a mortgage for buying a property.
When it comes to borrowing, banks will also work out affordability of a loan based on what the current rates are doing – lower rates you can borrow more, higher rates less.
Right now we’re in an environment of record low interest rates + an Official Cash Rate which is tipped to go lower this year.
So what does this mean for interest rates?
In simplest terms, the Official Cash Rate (OCR) has more of an effect on the floating rate (and shorter term rates). Than it does on the longer term rates – 3, 4 & 5 years. The longer term rates are more influenced by the cost of money from overseas which, in turn, is affected by any number of factors. Right now the cost of money from overseas is getting more expensive so we may see more of a gap between the shorter-term interest rates and longer term interest rates over the next year or so.
If I’m borrowing what should I do?
Ultimately this is something that every borrower has to decide themselves as it is influenced by many different factors. How big is the loan? Is it for an investment property or owner-occupied? Are you nervous about what might happen with rates? How much do you earn? The list goes on and even the Chief Economists cannot guarantee what will happen to rates. At the moment the feeling is that the shorter-term interest rates will continue to be low for the foreseeable future but, again, nothing is guaranteed.
The biggest influence you can have on how much interest you pay over the life of your loan is to structure your loans correctly. Everybody has different needs when it comes to structuring but, done correctly, it can be the biggest single factor in how quickly you will pay of your mortgage – and how much money you will save. Take the time to look at structuring your loans correctly and review the structure regularly.
