Are low interest rates here for good?

ByAndrew Mirams

No matter who you talk to lately, it seems most people are feeling a little uncertain about the future of Australia’s economy, especially since the COVID-19 pandemic hit and affected many vital industries to Australia such as tourism, retail and entertainment such as pubs and clubs.

Growth is slow, the retail sector is struggling, business and consumer confidence levels have fallen to the lowest levels ever since these statistics were recorded (although we are climbing out of the doldrums with recent weeks of steady improvements here), the coronavirus and trade tensions are hitting international markets and wage growth is stagnant.

At least if your wages are stagnant you are better off than around 1 million Australians who have been affected by the pandemic.

One of the only levers that’s been pulled by policymakers to try to turn things around is the interest rate one. As we know, rates are at their lowest level ever and there’s now not much ammo left in the gun to fire things along.

In February, the Reserve Bank of Australia warned that the official cash rate could stay at rock bottom “for decades” to come.

Of course, low interest rates are good news for those with mortgages… but they point to some pretty concerning issues more broadly.

Why you might not get a loan

At its most recent meeting, the RBA spoke of its concern about rising household debt and cited this as one of the reasons – on top of economic woes – why rates could stay low “for decades”.

While low rates could help the economy grow over time, the RBA is also worried they’ll fuel financial risk-taking among Aussies. The cheaper money is to borrow, the more people tend to borrow it. 

“We’ve made choices which give us structurally high housing prices and structurally high levels of debt relative to our income,” RBA governor Philip Lowe said. “It’s created a vulnerability because we’ve got a lot of debt on our balance sheets relative to income.”

Overestimating your borrowing capacity, not understanding your household expenses and hiding debts are some of the factors that impact your ability to secure a mortgage. 

As house prices continue to rise and jitters spread at the RBA, banks could be forced to take a more cautious approach to lending. Not having your house in order, no pun intended, is likely to impact your chances of mortgage success.

Government needs to act

Low rates might be good for borrowers, but if economic conditions don’t improve soon, most Australians will be impacted. And property markets will too.

One of the areas the government should be urgently turning its attention to is wage growth. Treasurer Josh Frydenberg should work on encouraging businesses to pay workers more via a tax offset, helping to put more money in people’s pockets.

Give businesses a break and incentivise them to employ people and pay them a decent wage. The small business write-off up to $150,000 that’s currently on offer will do little to help. If businessowners aren’t confident, they won’t spend. 

Offer the same write-off to employers who increase wages or offer more hours to staff. This can help address the biggest issues the nation faces now – underemployment and wage growth.

Higher wages help people to feel more resilient financially and, as a result, they’ll spend more in the economy. 
They’ll shop. They’ll travel. They’ll invest. They’ll buy a car or a house. They’ll get a new TV. They’ll go out for dinner. 

These are all things that many ordinary Australians increasingly feel like they should put off. Money is tight and only getting tighter. Everything seems to cost more and more, from petrol to electricity and groceries. The future looks grim. 

Why spend money you might not have for much longer? 

Higher wages also mean higher taxes, which puts money in the government’s coffers. They can reinvest in infrastructure, which they should be doing already to support the construction sector.

You want people to spend? Give them something. Of course, some people might sceptically baulk at the idea to “give them something”. Isn’t that what Kevin07 did? Yep. He sure did. He gave out cash stimulus to every single Australian and most of them went out and splashed on discretionary items that they would’ve otherwise avoided buying.

It’s a small but important part of the reason Australia avoided a recession during the Global Financial Crisis.

Here’s what I’d do

Low Interest Rates

Forget the surplus. What’s the point? It’s the equivalent of buying a packet of matches while your house is on fire. 

And it’s going to be virtually impossible to achieve given the billions the government will have to spend in the wake of the summer of devastating bushfires. Plus, the worst economic effects of the coronavirus are yet to be felt, I suspect.

Instead, Scott Morrison and Mr Frydenberg should urgently pour a stack of money into big infrastructure projects now. It’s nation-building, it supports construction and underpins jobs, it gives communities a vision for the future. Everybody wins. 

But unfortunately, these take time to get to market and whilst important, we need more urgent stimulus. 

The government should deploy policies to increase wages immediately. Five years of zero wage growth, at a time when the cost of everyday life has skyrocketed, is outrageous. Help lower the cost of living by offering subsidies for energy and fuel. 

And governments around Australia should offer some assistance to first homebuyers. The First Home Loan Guarantee scheme is a good start but it’s too small and a flash in the pan. Give young Australians grants to help them get into their first home.

And the big one… 

Give every taxpayer a prepaid debit card loaded with money. Restrict its use so it can’t be used online. You have to spend it in a store or a restaurant, or any kind of local business. 

Make it between $500 and $1500, on a sliding scale based on incomes, with pensioners through to those earning up to $90K getting the most, and those beyond that salary up to $180K getting the lower amount. 

Guess what will happen? People will always spend “free money” and this then flows into local restaurants and shops, who will need more staff – income tax receipts will rise – and then see their business turnover increases – boosting GST revenue.

People will buy the items that they won’t right now due to personal pressures.

First home buyer New

My final advice?

Don’t fix your home loan interest rate now, well at least not in its entirety. Instead, focus on using the savings on interest to pay down your mortgage faster. Take full advantage of the lower rate environment, which will EVENTUALLY boost consumer spending and confidence, to get yourself into a stellar financial situation.

Why do I say “entirety”? Well, there are some attractive fixed rates options presenting where you can effectively “prepay” rates at future interest rate cuts and effectively lock in low rates today that may appear on the horizon soon.

But 2 important things to note:-

  1. Don’t fix your total loan. This just restricts your options and flexibility by doing so, and
  2. Seek advice before contemplating a fixed rate. You need to understand the pros and cons of fixed rates and also be clear as to why you are doing this.

As always, we are here to help and would love to speak to anyone in relation to their interest rates and fixed rate options.

Andrew Mirams
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