During the global financial crisis, the official cash rate (OCR) plummeted from 8.25% down to 2.5% in a matter of ten months.
It was quite a shock to the system for borrowers – we’d all become accustomed to thinking that 6.5% was a pretty sharp rate. Then all of a sudden we were paying as little as 4%. It was a huge factor behind the property price boom – you can afford a lot more when you pay less interest. Since then, commentators have been constantly warning us to be prepared for interest rate rises. And banks haven’t become complacent. They still calculate your serviceability using around 7%, which can be frustrating: you think you have more money to invest but the bank’s calculator disagrees.
However, there are some indications that low is the new normal when it comes to interest rates. Here’s why they say that:
- Inflation is low. It’s lower than expected around the world, which contributes to low interest rates – they’re a tool to help stimulate the economy.
- Wage growth is low. Despite low unemployment in many countries, nowhere are we seeing strong wage growth.
- Ageing populations are slowing economic growth. This is a major concern in China, Japan and parts of Europe, and slightly concerning in New Zealand and Australia, too.
- Everyone is nervous. That includes central banks and policy makers – they’re feeling cautious about making any sudden moves, so if interest rates do increase, it’s likely to be gradual.
Obviously you need to get your own financial advice and nobody can foresee the future. However, indicators suggest that you shouldn’t be living in fear of a sudden and dramatic increase in home loan interest rates.