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The Reserve Bank has cut rates to low levels to encourage borrowing.

This is a good thing.

The strategy has worked.

Housing and construction are the backbone of our economy – because they generate so much employment and activity.

House price has increased – and that in itself is not a bad thing.

BUT…

Over decades of data – average annual growth in house price is 5-7%.

If it falls behind that – at some stage in the future, it will catch up.

If it runs in front of that – at some stage in the future, it will stagnate or fall back.

Recently there has been concern that house prices are rising too quickly, but the Reserve Bank does not want to raise rates while we as a country are still so stuck in the Covid mire.

So, the Treasurer turned to the banking regulator APRA – who has asked banks to assess loans 3% above current rate.

Banks currently assess around 2.5% above the current rate – so this will slightly reduce the size of the loans that a given salary can “buy”.

How this is implemented is very much in the moment of discussion – but it does mean that banks will now assess loans “as if” the rate is around 6%.

Recently I wrote and suggested that you should be paying your loan “as if” it is already 4%.

“Fix your payment not your rate” is a good saying.

While rates are low – the extra you are paying comes straight off the principle.

When rates eventually rise – your budget does not need to change.

The 6% assessment rate is a sensible hand brake and is entirely consistent with my 4%.

I am cautious in my approach to future rates; APRA is ultra-cautious – that is good.

Follow this link to my loan calculator (or HERE if you have my app Ask Alan installed)  and enter:

  • Your loan balance.
  • Your current rate.
  • Your remaining loan term.

You will receive:

  • Your current payment.
  • The payment you should make if you want to follow my 4% suggestion.
  • The amount of interest you pay each month.

As always if you’d like advice tailored to your own personal circumstances please call or email me anytime… It’s what I’m here for.

Ask Alan

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