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ยป What if interest rates were ten percent
Date published: 14/07/2011
Would 10% interest rates help me or hurt me?
With the ever-present spectre of rising interest rates and its impact on housing affordability, many people with mortgages are concerned that if interest rates go higher, they could lose their houses. But knowing that rising interest rates from the Reserve Bank of Australia (RBA) actually helps the Australian dollar and assists the economy is cold comfort for those who just lost their homes.
The RBA will raise the interest rates: know this and be prepared. Rates will rise, possibly in August and possibly again by December. The RBA will do this because it is the right thing to do at his point in the economy. They are trying to help the masses and sometimes you have to let the minority suffer in order to assist the majority.
In Australia’s aging population, there will be more retirees and less with mortgages and credit cards (we hope). The RBA may make the decision to lift rates to help grandma and grandpa, even if this means that the neighbour has to foreclose. In a previous column we looked at how the rate rises actually increase employment, even as they may lose houses.
The moral of the story and the lesson from the RBA is that we should “be prepared”. Borrowing to the absolute maximum when housing prices were high and interest rates were low was not a good idea; it showed no forward planning. Just because the bank told you that you “could” borrow that fabulous amount was not God saying that you actually “should” borrow that amount.
Assume for the sake of the exercise that interest rates will hit 10%. If you will not be able to afford house payments at that stage, then make the decision to downsize now, while you still have a choice, before the choice can be thrust upon you.
Start paying 10% off your mortgage as soon as you can: rebudget and cut back on non-essential spending as necessary. Using an iPhone app such as the “Pocket Planner”, you may see that even if the interest rates do not hit 10%, you could still potentially save tens of thousands of dollars in extra interest.
The RBA is taking a warning shot over the bow, to ensure that people hear the message: start saving and investing now; reduce unnecessary spending and prepare for a rainy day.
If people actually started to cut their spending, pay down their mortgages and reduce consumer debt, there would be no actual need for interest rates to increase. How many will listen? How many will act? If rates rise as we anticipate they will, it will be the ones who didn’t listen who feel the most pain.
As they used to say in the anti-terrorism ads: be alert but not alarmed. There is no reason to panic, just plan ahead. If rates hit 10%, you will be OK if you are paying extra off your loans. If rates do not hit 10%, you will be streets ahead.
For more information, or to discuss your specific situation, please contact me directly.
Jeremy Britton
24HourWealthCoach
Jeremy Britton is an independent wealth coach who advises on investment, business and life issues. Find more info on Wealth Dynamics or Jeremy’s inspirational videos by connecting on Facebook, Youtube or www.24HourWealthCoach.com. The “Pocket Planner” iPhone app may assist with mortgage reduction and also helps to calculate needs for life insurance and superannuation.
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