07 Jul Are we borrowing too much? – Bessie Hassan
Apparently we are really taking advantage of the low interest rates and while that seems like a good idea, there are some reservations and the possibility exists that we may just be overextending. Some good advice today on that subject from Bessie Hassan.
Kevin: As was widely tipped, the Reserve Bank held the cash rate at 1.75% earlier this month, which marked 12 months since the last cash rate movement. However, the verdict is that there’s a further rate cut on the way, with 68% of economists expecting one this year. Most are expecting the cut to happen in August, with November and then September nominated as the next most likely months for a rate cut.
Bessie Hassan, money expert at Finder.com.au, says borrowers shouldn’t get caught up in the hype of this historically low rate environment. She joins us.
Bessie: Hi. Good morning.
Kevin: It’s a bit of a danger that we’ll go out and borrow a bit too much, isn’t it? What are the indicators that we are borrowing more or even too much, Bessie?
Bessie: Kevin, based on historical data from the ABS, home loan sizes are expected to increase with the latest cash rate cut last month. What our research has found is that in five of the last seven rate cuts, home loan sizes actually increased the following month.
Kevin: That’s the indicator. Is there a correlation between low or lowering interest rates and how much we borrow?
Bessie: There does seem to be a correlation between low interest rates and how much people are borrowing. What we worry about is a false sense of security. We don’t want people getting caught up in the hype of a low-rate environment and then borrowing more than they can afford down the track.
The average loan size increased in five out of the last seven rate cuts, as I mentioned, and with this latest cash rate cut in early May, we are expecting that trend to continue. In fact, new loan figures that came out just this week already suggest that the market is recovering. In March, which was the previous month’s figures, the loan size was $357,200. In April, in the just-released figures, that has gone up to $361,500. Now, while that doesn’t take into account that latest cash rate cut, we are expecting this trend to continue, so watch this space.
Kevin: I know we’re talking here about the correlation between what happens with the interest rates, but there’s a big difference between the RBA does and sometimes what the banks do, as well. Are we more in tune with what the RBA is doing than what the banks are doing?
Bessie: They do tend to work in tandem these days. Following the cash rate cuts last month, 11 lenders announced within 24 hours that they would be passing on the discount to their customers. ANZ was the only one of the big four that wasn’t passing that on in full, only passing on 0.19%. A week on from the announcement, 51% – so just over half of all the home loan market – had announced they were passing on a discount of some sort to borrowers.
The good news is the standard variable rate has dropped from 5.12% to about 4.95%, and there are amazing offers out there at the moment. We’ve even seen a new bank come out with a really low fixed rate of 3.63%. Three is looking as though it’s becoming the new benchmark. If your rate has three in front of it, you are on to a good deal.
Kevin: Yes, pretty low, isn’t it? There was a time when the banks were almost operating totally independently of the RBA. Was that pressure from the government to bring them more in line, or do you think they’re listening more to what the consumers are saying about how we need to get lower interest rates?
Bessie: I think it could be a combination. Certainly, APRA sets the regulations. At the end of the day, they set the rules. Definitely getting that feedback from consumers, and the competitiveness of the market. They can’t afford not to drop rates. We’re seeing rates out there with threes in front of them, and if theirs are coming out much higher than that, that’s not competitive. It’s much cheaper to hold onto a borrower than to acquire new ones, so by reducing rates, hopefully that keeps customers happy and around for a longer time.
Kevin: It’s dumb question time, Bessie, if I can ask this dumb question.
Bessie: Go for it.
Kevin: If we were ever to move into – as has happened in some of the overseas countries – having the cash rate actually being negative, how does that work? Is someone actually paying the RBA to take the money, and if so, who is that someone?
Bessie: It’s actually the depositor. They must pay to keep their money with the bank. It is a crazy concept because we were talking about 7% interest rates just pre-GFC time, and now we’re at 1.075%, and it is likely that we will see another rate cut this year. I don’t think we’re there quite yet, but that is how it would work if we were to see that happen.
Kevin: Just to round out our chat, Bessie, what should we allow as a buffer in case things go pear-shaped?
Bessie: Always allow a buffer of about 2% to 3% to your current finances. This should have you covered if or when the cash rate increases. Keep in mind that as the cash rate rises by 0.25%, you’re typically paying about $50 per month more for a $300,000 loan size, and potentially thousands of dollars more over the life of your loan. Keep in mind that now is the time to be making extra repayments to minimize higher costs down the track.
Kevin: That’s good advice. You said earlier, too, that the interest rate we’re paying should have a three in front of it. Factoring that in, we should be allowing around 5% or 6% in our loan repayments, just to make sure.
Bessie: That’s exactly right. There are plenty of great deals out there, both of variable and fixed loans. Jump onto Finder and see if you can find a better deal.
Kevin: Nice plug there, Bessie. Well done. Good on you. Bessie Hassan there, money expert from Finder.com.au. Thanks for your time.
Bessie: Thank you.