Why we're going to see a lot of commentary happening about interest rate risesOct 14, 2021
This week: Why we're going to see a lot of commentary happening about interest rate rises
In the video above I look at why I believe we're going to see a lot of commentary around rising interest rates and practical steps you can be doing now to ensure that when you see these articles, you'll just shrug and move on.
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Hey, and welcome to Mel's Money Musings.
Today we're talking all about interest rates and that's because I believe we are going to start to see more and more articles come out around experts saying that interest rates are going to go up.
And what I don't want is you to see that freak out and and behave in a way that goes against all those beautiful financial plans you've set in place or just to freak out full stop.
So what I wanna do today is tell you why I think we are going to start to see that as well as what you should be doing now so that you are really not bothered by these news articles or even if this was actually to come to pass.
So why do I think we're gonna start to see these news articles?
Well, there's a number of reasons.
One, if we look across the ditch in New Zealand, the Reserve Bank have gone ahead and increased their interest rates by 0.5 basis points, which by 50 basis points or 0.5%, which is the first time they've done that in seven years.
Two, APRA acted last week in Australia to add a 0.5% buffer that I talked about last week, where if you go for a loan, they're now gonna assess you with a 3% buffer. So that it means that you're assessed as if that interest rate was higher because they're trying to get some heat out of the property market.
But the new things that have happened in the last week is, number three, economists have come out and said that they expect that the inflation rate will return to 2.5% by the end of 2022. Now this is two full years before the Reserve Bank predicted that inflation rates would be back at two and a half percent.
The Reserve Bank of Australia predicted this would happen in 2024, which is why they said they're not intending to move interest rates to 2024.
And the final reason is that the COVID roadmap announced by the Government this week, uh, and in that they looked at consumer sentiment and consumer sentiment is currently running at 106.2. So clearly optimistic terms because anything over a hundred is considered optimistic. It's the first time in five years that it's really been over that 106 mark.
So we're incredibly optimistic because we are coming out of lockdown. We are coming out with a buffer of savings that we are intending to spend, which is potentially gonna push up inflation rates, which is what economists are predicting.
And the concern is that is that happening too quickly? Are we gonna see the property market overheated further, which is why I think economists and articles are gonna start to come out to say interest rates could move faster than predicted.
Now, what does this mean for you?
Well, what I would be doing, I'm gonna talk to if I had a loan or if I want a loan.
So if I have a mortgage, what I'm a fan of and what I suggest to those people inside that My Financial Adulting Plan is that they repay it 1% to 3% more than the current interest rate that they're paying now. So you can jump onto any calculator and figure out what that new repayment amount would be. And then you'd make those extra repayments to a buffer account.
So just say, you decided to do that and you decided to repay 1% more. What that means is if at the end of 2022 interest rates go up by 0.5%, you don't care: (a) you're already paying at a higher amount, but (b) you've got that buffer there so that you've got that excess funds if you need it.
Now, if I was going for a loan, the bank is already going to assess you as if it's gone up by 3%, as if interest rates have gone up by 3%, thanks to the APRA announcement last week.
So really that's already factored in for you. Interest rate increases have already been factored in for you. So when you, or if you eventually get that loan, all you would wanna do is start to repay it at 1% to 3% more, again so that you are not concerned if interest rates were to go up.
So I believe this is going to be the start of articles coming out over the coming weeks, where they're going to talk to interest rates going up. And I believe a lot of consumers are going to start to either shrink their spending, or they're going to start to freak out and hoard cash, or just whack money off their loan, which they think is the thing to do.
Whereas if you've been following me for a while, you'll know that simply paying off your mortgage and not investing is really not the right thing that we should be doing, because that means we don't have multiple streams of income. We're putting all of our eggs in the one basket and you can't eat your house.
I hope you found today's Money Musings helpful. As always, what I hope that you do is listening to the voice of a number of experts, including me so that you can make up your own mind.
But the reason I do this here every single Friday is so that it gives you that expert voice, amongst the journalist articles, amongst the social media commentary and amongst the click bait frenzy so that you can come here and go, okay, this is the unbiased, put it all together, Mel's opinion. And then you can go from there and decide what you wanna do. That's all for me, have a great week.