Rates will increase in big steps

by John Kolenda, Executive Director

Yesterday’s decision by the Reserve Bank of Australia (RBA) comes as no surprise with most economists expecting interest rates to remain on hold, as we wait for a continuation of the good news we are currently hearing about the local and international economies.

We believe, however, that official interest rates will increase in large amounts when the RBA decides to move them up again.

The days of monthly interest rate movements of a quarter percentage point appear numbered following the momentous economic events of the past 18 months.

The RBA has left the cash rate on hold at 3.0 per cent for the past five months but there remains expectation that official rates could increase again late this year or early in 2010 when there are firm signs of a strengthening economy.

The RBA governor himself has warned home owners to be prepared to cover interest rate increases of up to 2 per cent on current rates as interest rates come back to more normal’ levels.

Regardless of when interest rates do start rising and the level they plateau at, it won’t be by the small moves of 0.25 per cent like it has been in previous years.

Home owners should instead anticipate rate hikes of at least 0.50 per cent when the RBA decides to tighten monetary policy, comparable to the dramatic slashing of the cash rate down from 7 per cent in September last year.

While this is a strong possibility the other scenario is that the rates are likely to move in consecutive months of a 0.25% - either way the rates will move up more rapidly.

Whilst home owners may be tempted to use their reduced home loan commitments now to boost their spending power, we recommend they budget for rates to rise again quickly when the economy turns around.

Mortgage holders must also be prepared for the major banks moving rates up ahead of an RBA decision because of escalating funding costs.

However, consumers also have the option of taking their interest rate destiny into their own hands by seeking a lower rate now on an existing home loan.

The mortgage market is continuously changing, often to reflect buying trends, so it is worthwhile for customers to keep in touch with an expert who may be able to show them products which offer substantial savings.

There is an enormous variance between lenders at the moment and many options available, so customers may also like to consider a Loan Market mortgage broker to negotiate on their behalf, as we can often secure an even better rate.