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Triple Buffers Will Absorb Rate Rises

Our national obsession has taken a break from sport and focused on the one thing many home buyers worry about but have little control over – interest rates.

Media is not content to let us enjoy the benefits of historically low interest rates or listen to the Reserve Bank Governor when he says rates are not going to increase any time soon.

Instead, day after day, week after week, month after month, we have to endure this endless speculation that interest rates are going to rise and, as a result, property prices will crash.

The speculation is driving everyone crazy, and I can understand why.

The endless commentary about when interest rates are going to rise and what it will do to the market are just that, it’s commentary.

It’s pure speculation, not news of substance.

For a start the supposition that property prices will crash as a result of an interest rate rise is just wrong.

That has never happened in the history of Australian real estate, and it won’t happen this time.

History tells us we need four or five or six consecutive interest rate rises to start to have an impact on property prices.

That also is not going to happen any time soon.

Even if we were to experience an interest rate rise sometime towards the end of this year – and I remind you the Reserve Bank Governor Philip Lowe, the guy who decides these things, says that it’s unlikely to happen – if something changes and the official interest rate does rise, homeowners have built up such a significant buffer over the past couple of years it will really not be a problem for most borrowers.

In fact there are several different buffers in the system insulating borrowers from the impact of future interest rate rises.

Household savings are up in Australia, we haven’t been able to travel overseas, we didn’t even need to travel to the office in the past two years, so many households are cashed up.

Governor Lowe says that after two years of saving there is an extra $250 billion in Australian’s bank accounts.

At the same time borrowers have built up huge buffers in their mortgages by paying off extra, over and above the required monthly payments. Three years ago, it was the equivalent to one year’s interest and mortgage repayments – today it’s more than two years for the average household.

The head of Bendigo and Adelaide Bank this week said that most customers could easily cope with a gradual rise in interest rates because so many of them are ahead on their mortgage payments.

The other big buffer in the system is the rule that requires banks to ensure that if interest rates rise at some point, their customers can cope with it.

Lenders are required to assess borrowers’ ability to repay loans assuming much higher interest rates.

That means that you are taking out a property loan at an interest rate of 2.5%, the bank examines your finances and ensures you are able to pay handle your repayments even if rates hit 5.5%. In other words, there’s a 3% buffer built into the system.

Reserve Bank Governor Philip Lowe and the Deputy Governor Guy Debelle both say they’re in no hurry to lift the official interest rate – and that the buffers in the system mean that most borrowers will be able to cope when, eventually, the rate does rise.

At some point we need to actually listen to what the people who decide on interest rates are saying, because that is more relevant than the constant speculation by bank economists and media commentators.

In my opinion Governor Lowe is a straight shooter, who says exactly what he believes to be true – and at the moment what he is saying is that an interest rate rise this year is unlikely.

All of this speculation needs to stop, it serves no purpose other than to create clickbait headlines for shallow journalists.

Let’s listen to the actual experts, the people who make the decisions, and stop causing unnecessary stress to people with mortgages.


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