Interest rates are always a key concern for anyone who’s thinking about buying property. These are the things that need to happen for rates to increase.

What’s the first thing that a property investor looks at when they’re trying to get a loan?

It’s always the interest rate. And it’s obvious why. The higher the interest rate, the more you’re paying every month to keep the property.

A lower interest rate gives you more control over your cash flow and may make it easier to build your portfolio.

Wealth for Life cash rate
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That’s a benefit that Wealth for Life clients Chris and Charlotte enjoyed.

Chris and Charlotte weren’t happy to find out that their lender wasn’t offering them the best interest rate possible. As loyal customers, they felt that they deserved better than the 5.79% rate they had.

Chris talked to his lender and managed to drop the rate slightly to 5.13%. But Wealth for Life managed to drop it further.

That meant the lender still hadn’t offered Chris and Charlotte the best possible rate.

So insulted were the couple that they decided to change lenders. That gave them access to a 4.28% rate.

The end result?

Monthly savings of $186.04.

This may be an example of a couple taking active steps to lower the rate on their loan. However, the point still stands.

Lower rates means you’re shelling out less money.

That’s why you need to keep an eye on what’s happening with lenders’ interest rates. And to do that you need to understand two things:

  1. What the cash rate is.
  2. The factors that can affect both the cash rate and lenders’ interest rates.

What is the Cash Rate?

The Reserve Bank of Australia (RBA) sets the national cash rate.

Wealth for Life RBA rate
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The RBA is the country’s central bank and it’s wholly owned by the Commonwealth of Australia. It takes responsibility for maintaining stability within Australia’s financial industry.

The RBA maintains a board of nine members, who are responsible for setting the cash rate.

The cash rate is the rate that the bank will offer on overnight loans made to commercial banks. As such, changes to that rate affect the interest rates that the banks offer to their customers.

Every month, the RBA’s board gets together to examine the cash rate. They’ll choose to lower, raise, or maintain the current rate.

It’s important to note that a low cash rate does not guarantee a low interest rate on a loan. Lenders use their own discretion to decide on their interest rates, which will have to be higher than the cash rate for them to profit. The cash rate essentially acts as an important market guide.

As of August 216, the rate’s stood at 1.5%. This creates a favourable environment for borrowers as it should make it easier for them to access loans.

But it’s possible that the rate could increase at any time. Let’s examine the various things that need to happen for the cash rate or lender interest rates to increase.

Item #1 – Changes in Government Policy

Any change to government policy has the potential to impact interest rates.

We can see a current example of how this could occur in Labor’s push to get rid of negative gearing for established properties. 

Wealth for Life Government policy
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The aim here seems to be to make it easier for residential buyers to purchase property.

However, Wealth for Life founder Anthony Peluso sees an issue here. No negative gearing means lower investor interest. They’ve lost a major strategy that helps them to build their portfolios.

And that loss of demand affects how lenders operate:

“<The> first thing they’re going to do is begin to increase interest rates. The balance sheets need to look healthy from their own perspective,” says Anthony.

“So, if the number of people borrowing money for investment purposes dwindles, banks are going to make up that money somewhere else. <The> first thing they’re going to do is increase the cost of getting money.”

This is an example of policy affecting lenders’ rates without necessarily affecting the cash rate.

Item #2 – Inflation

Inflation and interest rates are always linked. The term inflation relates to the rise in the cost of a country’s goods and service. When those costs increase, inflation occurs.

The knock-on effect is that people can’t buy as many things. This creates higher cost of living. Incidentally, this can also affect the demand for property.

When inflation’s high, this suggests that a nation has a strong economy. When it’s low, the economy’s struggling. 

Wealth for Life inflation
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The RBA will keep an eye on inflation when making decisions related to the cash rate. High inflation may prompt them to increase the cash rate in an effort to slow economic growth. The aim here is to bring the cost of living back in line with what people can actually afford.

The rate will decrease when inflation’s low. The aim here is to encourage further spending to boost the economy.

It’s a delicate balancing act with the cash rate affecting inflation and vice versa.

Item #3 – Supply and Demand of Credit

The demand for credit is also a factor when it comes to interest rates.

Remember that lenders operate businesses. That means supply and demand affect their products as they would any other type of business.

If borrowers aren’t coming to them, they may slash their interest rates to attract more people. Again, they can do this irrespective of what the cash rate looks like. Of course, an increase in demand from borrowers gives them the leeway to raise the cost of accessing credit.

On the supply side, increases will lead to interest rates falling. The lender can essentially sell more products, which means they’re more confident in offering lower rates.

Lower supply, which often occurs due to regulatory action or tightening of lending criteria, can lead to higher rates.

Item #4 – The Employment Rate

The higher the interest rate, the harder it is for businesses to expand and create new jobs. 

That’s the main issue when it comes to the cash rate and the unemployment rate. When unemployment’s high, the RBA may take this as a sign that the economy needs spurring on. As a result, they’ll slash interest rates to help businesses to access more credit.

The idea is that this increased access to funding allows businesses to expand and create more jobs.

Of course, low unemployment suggests that job supply meets demand, which can create inflationary pressure. In this situation, the RBA may raise the cash rate.

Item #5 – The Exchange Rate

The strength of the Australian dollar also influences the decisions that the RBA makes in relation to the cash rate.

Wealth for Life demand
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The exchange rate is extremely important to Australian interests.

A high cash rate can lead to more investors putting their money into a country’s currency. This leads to higher exchange rates for that currency, which is a great result for currency investors.

The problem is that a stronger Australian dollar causes exporters to struggle. Their goods cost more compared to those from countries with lower exchange rates. As a result, they struggle to find buyers.

This has wider implications in terms of unemployment and the strength of the national economy.

As a result, the RBA will consider the exchange rate when making cash rate decisions. If the exchange rate’s so high that it’s affecting business owners, the RBA may lower the cash rate.

Invest Safely While Keeping Interest Rates in Mind

As you can see, the rate that your lender offers isn’t as simple as it first appears. Of course, the lender’s desire to make a profit plays a large part in the rates they offer.

But there are plenty of other factors at play that affect interest rates on a national level.

Wealth for Life can help you to create an investment strategy that accounts for all of these issues. Best of all, you’re building a strategy with investors who’ve been there and done it all.

Are you ready to learn from the best? Get in touch today to arrange your strategy session.

Interest rates are always a key concern for anyone who’s thinking about buying property. These are the things that need to happen for rates to increase.

What’s the first thing that a property investor looks at when they’re trying to get a loan?

It’s always the interest rate. And it’s obvious why. The higher the interest rate, the more you’re paying every month to keep the property.

A lower interest rate gives you more control over your cash flow and may make it easier to build your portfolio.

Wealth for Life cash rate
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

That’s a benefit that Wealth for Life clients Chris and Charlotte enjoyed.

Chris and Charlotte weren’t happy to find out that their lender wasn’t offering them the best interest rate possible. As loyal customers, they felt that they deserved better than the 5.79% rate they had.

Chris talked to his lender and managed to drop the rate slightly to 5.13%. But Wealth for Life managed to drop it further.

That meant the lender still hadn’t offered Chris and Charlotte the best possible rate.

So insulted were the couple that they decided to change lenders. That gave them access to a 4.28% rate.

The end result?

Monthly savings of $186.04.

This may be an example of a couple taking active steps to lower the rate on their loan. However, the point still stands.

Lower rates means you’re shelling out less money.

That’s why you need to keep an eye on what’s happening with lenders’ interest rates. And to do that you need to understand two things:

  1. What the cash rate is.
  2. The factors that can affect both the cash rate and lenders’ interest rates.

What is the Cash Rate?

The Reserve Bank of Australia (RBA) sets the national cash rate.

Wealth for Life RBA rate
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

The RBA is the country’s central bank and it’s wholly owned by the Commonwealth of Australia. It takes responsibility for maintaining stability within Australia’s financial industry.

The RBA maintains a board of nine members, who are responsible for setting the cash rate.

The cash rate is the rate that the bank will offer on overnight loans made to commercial banks. As such, changes to that rate affect the interest rates that the banks offer to their customers.

Every month, the RBA’s board gets together to examine the cash rate. They’ll choose to lower, raise, or maintain the current rate.

It’s important to note that a low cash rate does not guarantee a low interest rate on a loan. Lenders use their own discretion to decide on their interest rates, which will have to be higher than the cash rate for them to profit. The cash rate essentially acts as an important market guide.

As of August 216, the rate’s stood at 1.5%. This creates a favourable environment for borrowers as it should make it easier for them to access loans.

But it’s possible that the rate could increase at any time. Let’s examine the various things that need to happen for the cash rate or lender interest rates to increase.

Item #1 – Changes in Government Policy

Any change to government policy has the potential to impact interest rates.

We can see a current example of how this could occur in Labor’s push to get rid of negative gearing for established properties. 

Wealth for Life Government policy
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

The aim here seems to be to make it easier for residential buyers to purchase property.

However, Wealth for Life founder Anthony Peluso sees an issue here. No negative gearing means lower investor interest. They’ve lost a major strategy that helps them to build their portfolios.

And that loss of demand affects how lenders operate:

“<The> first thing they’re going to do is begin to increase interest rates. The balance sheets need to look healthy from their own perspective,” says Anthony.

“So, if the number of people borrowing money for investment purposes dwindles, banks are going to make up that money somewhere else. <The> first thing they’re going to do is increase the cost of getting money.”

This is an example of policy affecting lenders’ rates without necessarily affecting the cash rate.

Item #2 – Inflation

Inflation and interest rates are always linked. The term inflation relates to the rise in the cost of a country’s goods and service. When those costs increase, inflation occurs.

The knock-on effect is that people can’t buy as many things. This creates higher cost of living. Incidentally, this can also affect the demand for property.

When inflation’s high, this suggests that a nation has a strong economy. When it’s low, the economy’s struggling. 

Wealth for Life inflation
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

The RBA will keep an eye on inflation when making decisions related to the cash rate. High inflation may prompt them to increase the cash rate in an effort to slow economic growth. The aim here is to bring the cost of living back in line with what people can actually afford.

The rate will decrease when inflation’s low. The aim here is to encourage further spending to boost the economy.

It’s a delicate balancing act with the cash rate affecting inflation and vice versa.

Item #3 – Supply and Demand of Credit

The demand for credit is also a factor when it comes to interest rates.

Remember that lenders operate businesses. That means supply and demand affect their products as they would any other type of business.

If borrowers aren’t coming to them, they may slash their interest rates to attract more people. Again, they can do this irrespective of what the cash rate looks like. Of course, an increase in demand from borrowers gives them the leeway to raise the cost of accessing credit.

On the supply side, increases will lead to interest rates falling. The lender can essentially sell more products, which means they’re more confident in offering lower rates.

Lower supply, which often occurs due to regulatory action or tightening of lending criteria, can lead to higher rates.

Item #4 – The Employment Rate

The higher the interest rate, the harder it is for businesses to expand and create new jobs. 

That’s the main issue when it comes to the cash rate and the unemployment rate. When unemployment’s high, the RBA may take this as a sign that the economy needs spurring on. As a result, they’ll slash interest rates to help businesses to access more credit.

The idea is that this increased access to funding allows businesses to expand and create more jobs.

Of course, low unemployment suggests that job supply meets demand, which can create inflationary pressure. In this situation, the RBA may raise the cash rate.

Item #5 – The Exchange Rate

The strength of the Australian dollar also influences the decisions that the RBA makes in relation to the cash rate.

Wealth for Life demand
  • Facebook
  • Twitter
  • Google+
  • Pinterest
  • Gmail
  • LinkedIn

The exchange rate is extremely important to Australian interests.

A high cash rate can lead to more investors putting their money into a country’s currency. This leads to higher exchange rates for that currency, which is a great result for currency investors.

The problem is that a stronger Australian dollar causes exporters to struggle. Their goods cost more compared to those from countries with lower exchange rates. As a result, they struggle to find buyers.

This has wider implications in terms of unemployment and the strength of the national economy.

As a result, the RBA will consider the exchange rate when making cash rate decisions. If the exchange rate’s so high that it’s affecting business owners, the RBA may lower the cash rate.

Invest Safely While Keeping Interest Rates in Mind

As you can see, the rate that your lender offers isn’t as simple as it first appears. Of course, the lender’s desire to make a profit plays a large part in the rates they offer.

But there are plenty of other factors at play that affect interest rates on a national level.

Wealth for Life can help you to create an investment strategy that accounts for all of these issues. Best of all, you’re building a strategy with investors who’ve been there and done it all.

Are you ready to learn from the best? Get in touch today to arrange your strategy session.

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