Predicting interest rates

Predicting interest rates

Posted on Monday, December 19 2011 at 5:22 PM

Most investors always have some sort of New Year’s resolution. Buy another property, pay down mortgages or do more research in one area. This Christmas people are confused. No one knows exactly how bad the European crisis will get and for investors, that means no one knows what will happen to interest rates in 2012.

Housing Industry Association economist Harley Dale says it’s the most uncertain Christmas the world has experienced for “years and years” and those hoping for some extra cash this Christmas might be thinking that right now is a good time to lock in their interest rates.

Les Harris of Mortgage123 says many locked-in rates are sitting below the six per cent mark.

“A lot of investors are happy to lock in because they know what their commitments are, they know the rent and what they have to come up with each week.”

However, Hale predicts rates will fall by at least 50 basis points anyway, so you might be better off staying variable for now.

“Rates could fall by 50 points, they could fall by 300. It’s an absolute lottery,” he says.

“If there was a GFC (global financial crisis) mark two, the Reserve Bank would have to cut rates by more than what they did in the GFC because the banks won’t pass it all on. That would mean the cash rate falling by more than 300 points. I stress that’s not our core view though, you would need a Lehman Brothers equivalent collapse for that.”

Before you panic, Hale points out “some kind of intervention” from the European Central Bank is almost inevitable and so a European meltdown most probably won’t occur.

In fact, things could turn around for the better and then growing inflation pressure in Australia would actually see interest rates increase.

“If people are after a bit of peace of mind and they value stability, then fixing at least part of a loan is a good option to consider, given the heightened uncertainty. It comes down to peace of mind. Do people feel comfortable taking a punt on that happening?” Hale asks.

“But if you look at what’s going on, you would have to say that rates have got to fall further, so there’s probably more savings to be made with a variable loan.”

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