Should you fix your loan’s interest rates

A lot of people are beginning to ask whether they should fix their interest rates, and it’s not surprising with the rate rise speculation constantly being drummed up in the media.

Everyone keeps asking RBA Governor Phillip Lowe when rates will go up and even though he is planning to stick to his original timeline of 2024 at the earliest, economists and commentators keep insisting it will be earlier.

But the RBA doesn’t have a great history when it comes to predicting future rate movements, and who wants to believe everything the media tells them?

Rate rise predictions are at odds with what b Invested founder Nathan Birch has been telling us for a long time. His opinion, which is not financial advice, is that interest rates are stuck at a zero interest rate policy.

He doesn’t believe significant rate rises could be sustained by the economy, but rather that the most the market could handle would be two rate rises of 25 basis points each. This means half a per cent all up.

Let’s pause for reflection

The last time the RBA raised the official cash rate was in 2010. More than 11 years ago.

Since then, rates have either been left on hold or reduced. We are now at a historically low level of 0.1%, which is 10 basis points. Before this, it was stuck for about three years at 1.5%.

Midway through 2019, rates began to fall so that they are now less than 1/10 of where they were two years ago. In that time, our government has taken out more than a trillion dollars in debt. So, what would be the chance of them going back to where they were?

 If interest rates went up to 1%, Nathan says the government would be paying 10 times what it is today in interest on its debt. And the homeowners who have taken out a lot of debt based on historically low interest rates would not be able to make their repayments either.

The APRA effect

When APRA tightened lending rules so that there was a 3% buffer when banks were assessing loan applications, it was largely seen as a measure to stop borrowers being able to overstretch themselves. Nathan believes as part of a zero interest rate policy, that buffer would be essential to ensure that not everyone could just automatically afford to go further into debt. There would still be a cut-off point.

Hyperinflation

For a long time, Nathan has been predicting hyperinflation in Australia. He believes it will emerge over a couple of years and then accelerate in the fifth year and beyond. He points to the rising price of essentials and many other things over the last 12 months as indicative of those initial stages.

For the government or central bank to try and stop inflation, the way to do so would be through raising interest rates, but if they do so at an official level, Nathan believes it will throw the economy off a cliff.

Should I fix?

Interest rates on fixed interest loans have been increasing steadily in recent months and it could be that the RBA is letting the banks do the dirty work, but in the meantime, variable rate loans have not been rising.

Everyone is different and has their own unique situation, but Nathan has not fixed any of his loans. He’s kept them variable.

He doesn’t believe the media when they say rates will increase, just like he doesn’t believe the media on a number of matters.

If there is a rate rise of a quarter of a per cent, or two rises of a quarter of a per cent, Nathan believes rates will have to come down again soon afterwards to keep the economy alive.

Of course, what you do is up to you, but there is always help and advice out there.

Speak to Zinger Finance Mortgage Strategists