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interest rate to go up or down

Discussion in 'General Investing Discussion' started by bronto, 23rd Jan, 2009.

  1. bronto

    bronto Member

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    Hi guys, im a new person here who needs some advise please. I want to buy my first home in a few months and want to know whether interest rates are going to go up or down in the future.
    Wanted this year to be good for me financially.

    Thanks in advanced.
    Great site
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In the short term (this year) I think we will see interest rates continue to drop as the economy deteriorates, and stay low until things start to show signs of recovery.

    I think it may well be a couple of years before interest rates start to head up again - but when they do it could well be quite quick (although I doubt it will be as quick as they came down).
     
  3. Chris C

    Chris C Well-Known Member

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    I agree with Sim on rates coming down over the next few month, they will probably continue to come sharply down at least in the short term.

    Though I tend to disagree on the notion that interest rates will go back up quickly when they do start going back up (at least 18 - 24 months away). I think we will see reasonably low interest rates (ie. lower than they are now) for at least 3 - 5 years, given I'm not expecting Australia will see the growth that we saw in the last 5 years running into 2007.

    Though I should point out at this point that this is all speculation and you shouldn't be making any major financial decision purely upon it. As has been proven countless times recently, just because something is likely to happen doesn't mean it will.
     
  4. bronto

    bronto Member

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    up or down

    thanks guys, that is great news. Now I just need to keep serching for houses.
    What a great site, love it.
     
  5. bronto

    bronto Member

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    up or down

    So should i allow to be able to afford for the interest to double for when they do go up eventually
     
  6. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I would base your calculations of affordability on an expectation that you will be paying rates at 8 or 9% at some point in the future. Depends on your plans for the property and the loan - if you intend to pay it off as soon as possible while rates are cheap, then long term rates don't matter so much.

    If you plan on using IO loans, redrawing equity, not paying down principal for a long time, etc - then you will want to make sure that you can afford higher rates which will happen at some point.
     
  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I suspect we will see inflation rear it's ugly head again sooner rather than later - but that doesn't necessarily mean growth.

    How the Govt/RBA will choose to tackle this will be interesting to see - increasing rates will have negative impact on growth and may not have much impact on inflation anyway.

    Either way, when the RBA does finally deem it is time to start increasing rates again - assuming we have seen historically low rates - I believe we'll see a fairly sharp tightening of monetary policy to put a quick stop to things getting out of hand. Which I suggest will mean a couple of hundred basis points rise within 12 months - but that doesn't mean rates will be high at that point given the low base we would have come from.

    Just my thoughts.
     
  8. Chris C

    Chris C Well-Known Member

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    I think in the longer term, 4 - 5 year onwards there may well be quite a bit of pressure on rates given that I'm expecting once we are through this tough period (next 1 - 2 years) China and India (along with the rest of Asia) will resume there rapid development. It will take awhile to get back into full gear but once it does it will more than likely result in a lot of money coming Australia's way putting inflation pressures on our economy in light of strong growth.

    So I think it is completely reasonable to expect that in the longer term you will have to pay interest rates that are closer to 7, 8, 9 even 10%pa.


    I definitely see what you are getting at, I just take a slight different view on inflation's prospects. Firstly I don't think it will be a major threat over the next year or two, and secondly I'm not certain that the RBA will be all that worried about inflation for quite a few years yet.

    Also I'm assuming that the AUD should be reasonably strong in the longer term to counter act that the growth we should see in commodity prices (oil) in the future. Also I'm expecting that once we are past this global recession commodity prices will resume a much more stable growth trend rather than the speculative growth we were seeing in 2007/2008. That way I think we will probably avoid the reemergence of the "imported inflation" phenomena we were experiencing before the bubble burst.


    See I tend to disagree on the notion that the RBA would aggressively raise rates like that for no other reason than aggressive rate raising would catch a lot of investors, home owners and business unawares and would have major implications on the certainty in the market, especially while there is a lot of residual unemployment left in the economy.

    I'm expecting a much more spread out approach like that seen from 2002 - 2007, 25 basis points at a time with 2 - 3 months between increases. Though this also has a lot to do with my belief that recovery will be on the slow side so the RBA will have ample time between making rates decisions. Of course if there is a much quicker rebound (ie China resumes high growth sooner than expected) then I'd expect the RBA will obviously look to up rates quicker.

    Sim, can I ask you? What are your intentions when it comes to the potential of fixing you rates on your IPs and margin loans in the future? Are you thinking about doing it, or are you planning to just stay variable?
     
  9. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    In general I never fix rates. I prefer to keep my finances flexible and easily restructured as my personal situation changes.

    I am considering fixing one of my loans for a property which I am unlikely to refinance or sell in the next few years, but I am undecided on that yet. I won't be fixing any of my other loans.
     
  10. Jacque

    Jacque Team InvestEd

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    If fixed rates for 3-5 yrs went lower than 4% in the near future then I'd definitely consider fixing :) but then again everyone's situation is different, as well as their future plans, cashflow and level of risk.

    At the moment I have only one fixed loan, that is quite low and only has less than 12 mths to go, so is not worth breaking. All others are now variable, with one costing us $$$ recently in break costs. It wasn't an easy decision to make, as it was our largest loan but given the period left on it and the current environment, it made financial sense to break when we did.
     
  11. AsxBroker

    AsxBroker Well-Known Member

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    Hi Jacque,

    I'd be amazed if 3 to 5 year rates dropped to 4%, that would mean the variable and shorter fixed rates would be extremely low. Though saying that economist are expecting 1.5% between now and mid year. So it may happen.

    Cheers,

    Dan