Apr 6, 2018 | Wealth management

5-Part Interest Rate Series: Part 5

Welcome to our 5 part series where we’ll explore the factors that may drive interest rates over the coming year and what you can do to insulate yourself against any changes.

Click here to read part 1
Click here to read part 2
Click here to read part 3
Click here to read part 4

Part 5: It’s Going To Get Tough

Welcome to part 5 of our 5 part series where we explore the alarm bells which no one is paying attention too.  

The fifth and final instalment of our series is here and given we haven’t had clients calling in panic, I can only assume readers are taking the “she’ll be right” approach.  Although very Australian, it may be the wrong time to deploy this tactic.  There are too many warning signs to ignore so in this article I want to line up all the factors we’ve explored over the past couple of months to paint the full picture of what’s in front of us.

Reputational damage – Deep down I think we all know banks do wrong by us.  I work in the industry and even I couldn’t predict what would come to light during the royal commission.  Fraud is widespread, bribery features, any other business or individual would find themselves barred from the industry or in jail.  But no, there’ll be a few fines paid and life will go on. They’re “too big to fail” but there will be consequences and if Aussie banks credit ratings take a hit, borrowers are going to feel it.

Regulatory intervention – It has taken a couple of years but regulators are starting to see the impact of their sanctions.  They’ve restricted investment debt, interest only borrowings and now the spotlight is on applicants disclosed livings expenses.  By restricting the flow of credit into the housing market we’re seeing asset prices cooling, most evidently in Sydney.  It’s been a long time since Australia experienced a significant pull back in the housing market, to the point where most people I speak with don’t think it’s possible.  Let me assure you, we’re in a debt bubble, credit has been too cheap for too long and asset prices are inflated as a result.  When debt is no longer cheap we’re in for a shock.

Record levels of household debt – Wages aren’t rising, they haven’t for a long time.  In fact the cost of living is now outpacing wage growth.   We’re not earning more money but we’re taking on more debt than we ever have.  Remember, interest only loans don’t last forever.  Gone are the days of 15 year interest only loans (looking at you Westpac).  When you borrow money there is an expectation that you pay it back.  But of course.. in Australia we pay our loans back from future profits when our houses double in value after 5 years..

Rising interest rates in America – America has announced they plan to raise rates a further 3 times this year, 4 times in total.  This will spill into the bond market where our banks get roughly 50% of their capital.  Yes the banks make billions of dollars profit each year but do you really think they’ll take a hit if their funding costs rise?

I don’t mean to be a ‘doom and gloomer’ but I feel it’s my responsibility to present the risks as I see them and to advise people to proceed with caution.   Surround yourself with trusted advisers, whether its investment or debt – seek advice.

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

SPEAK WITH US TODAY

A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a free consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a free consultation