Interest Rates Going Down? 1 Reason Why I Am Right and 3 Reasons Why I’m Wrong!
Nothing makes the heart flutter and the knees quiver quite like the news that interest rates might be headed down again. We have bright imaginings of more money in the bank and spending it on having loads of fun. It would indeed be lovely if we got a rate drop by Christmas. So what is my one reason why I believe interest rates are on the slide?
- Fixed Rates are Going Down
Huh? What does that have to do with variable rates going down? Well, I won’t confuse the issue too much by boring you with information about money markets and the like. However, every bank in Australia has a team of people in a little room (my kids love Charlie and the Chocolate Factory, whilst it is inaccurate to describe these people as Oompa Loompas, it is mildly amusing) placing all the variables that could possibly indicate where the future of interest rates lie into a magic cauldron and coming up with an answer. At the moment, as a mortgage broker, I am getting flooded with emails from all the lenders I deal with saying, FIXED RATES DROPPED! The little people standing around the cauldron are looking into the future and have decided where mortgage rates are going. Down!
But the news says otherwise! I hear you say. To be honest, I trust the little people in the back rooms more than the news. Why? Firstly, because they are paid large amounts of money to work full-time on getting these things right. The news people are paid to give you interesting information so you watch them and not the competitors. News readers are great at news, Bankers are great at money! Secondly, and most importantly, if they are right they make loads of money for their company, if they are wrong they lose loads of money for their company. Every year we hear the profit news from CBA and ANZ and the others and we all fall about in shock at the new multi-billion dollar record profit they made. Given that these guys are pulling in the big bucks from you and me, I am going with the fact that they usually get it right!
Now, before you crack out the champagne and start dancing in the streets. Here are my 3 reasons why I might be wrong.
1. My Crystal Ball is Broken
Ok, I am being slightly silly. But the truth is there is no inside information, no back room data that exists that can tell us what is going to happen in the future. We have enormous wads of information that the banks are sifting and using to provide us with fixed rates.
In the middle of 2008. Interest rates were at about 9.5% and all the news reporters were saying that rates were going higher. People were anticipating interest rates hitting 11%-12%. Then, out of nowhere, the Global Financial Crisis hit and within a few short months I was doing loans for people at 4.9%. I might add that fixed mortgage rates were at about 8.5% at the time. The experts in the back rooms were right about the direction of the next rate change. However, they could never have predicted how quickly rates dropped.
Beware! Things can change overnight!
2. I’m Not Sitting On My Yacht On Sydney Harbour Sipping Champagne
Correct! I am being silly again. The point I am trying to make is that if I really knew where rates were headed I would be like Biff from “Back to the Future” who gets given a book with every sporting outcome for the next 50 years. I would immediately invest everything I had and turn into a Billionaire very quickly and subsequently wind up sitting on my Yacht sipping Champagne spending time with my family and generally enjoying life. I would not be writing this article and I would not be spending time working as a mortgage broker.
Again, there is no inside information or tricks to knowing the future and never will be.
3. We Live in Difficult Financial Times
In the past 100 years we have seen depressions and recessions, stock market crashes, Two World Wars and all sorts of other things happen to mess up our economy. At this point in time we have countries on the verge of bankruptcy such as Greece, The USA managing their finances poorly and being downgraded in the credit ratings. We also have over one billion Chinese and another billion Indians ramping up their standard of living and joining the middle classes. They are purchasing lots of things they have never had before such as cars and mobile phones.
In the midst of this Australia has one of the strongest financial systems in the world. We can pat ourselves on the back for putting pressure on Governments to manage the books well.
What does this all mean? Who knows!!! These are all factors the experts use to calculate where interest rates are going, but none of us have any control over them. Spain could go bankrupt tomorrow and send every financial market in the world into a spin. Every prediction every expert made could be wrong.
I hope I am giving you a sense of the complexity and unpredictability of the situation!
Having said all of that, I will continue to watch the fixed interest rates as the best indication of where variable mortgage rates are heading. My Mortgage Broking experience tells me this is the most important metric to watch!
Article by James Parnwell
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