What interest rate rises mean for you and your investment

What interest rate rises mean for you and your investment

Posted on Tuesday, February 14 2012 at 3:09 PM

The Commonwealth Bank has become the latest lender to break ranks with the Reserve Bank of Australia (RBA) and raise rates out of cycle by 0.1 per cent.

It follows a decision by ANZ and Westpac to raise rates last week (ANZ by six basis points or 0.06 per cent to a variable rate of 7.36 per cent and Westpac by 10 basis points or 0.1 per cent to a variable rate of 7.46 per cent).

Property author and millionaire Jan Somers says for those freaking out about the prospect of a rate rise, despite the RBA keeping rates on hold this month, they should consider locking in at least 70 per cent of their loan for the ‘sleep at night’ factor.

“My philosophy has always been to fix, it’s insurance if they go up,” she says.

“If rates go down, you’d be paying extra but it’s money you’ve paid for insurance.”

Somers has always locked in at least 50 per cent of all of her loans because it means she’s less exposed if something drastic happens.

“The key to long-term investing is to cover your backside and cover those unforeseen circumstances.”

Michael Yardney of Metropole says although the rate rises are minimal, they could have a big impact on confidence.

“Many investors were thinking interest rates would drop, what’s suddenly happened is an about face. Having said that, the RBA kept rates on hold and that’s a vote of confidence. Investors should now look at their finances, because banks might restrict lending, and maybe it’s a good time to put up one’s buffers. If you’re concerned about cash flow, it might be worth considering locking at least a portion of your loan.”

Senior economist of Australian Property Monitors, Andrew Wilson, admits any slight rises could harm “early signs of increased confidence”, but 2012 should still be a recovery year.

“This won’t have a great deal of an impact on housing affordability but it will continue to make buyers and sellers cautious,” Wilson says.

“There are still competitive rates out there and mortgage providers are prepared to deal to get business.”

Director of Reality Economics Liam O’Hara agrees the latest announcement hasn’t been good for confidence and confused many investors.

“Many mortgage holders may not know the theory behind the economics but are acutely aware that the RBA sets a short-term rate that all other financial institutions adhere to, without too much fuss,” he says.

“It may become an increasing concern to those in debt when unofficial interest rate movements deviate from the stated official RBA rate, causing potential uncertainty in the investment market. In practice, the RBA’s cash rate is just a benchmark rate that banks use for pricing other interest rate products. In reality, the Australian economy, still in uncertain times, requires certainty in its policy interest rate stance, so the Australian economy concentrates on the real economic activity, not the profit concerns of a few major banks.”

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