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NEWS: Property Investing and Real Estate In Australia

Will Interest Rates Go Lower in 2015?

Date: 20/01/2015

weaker growth and lower inflationThe Australia and New Zealand Banking Group Limited (ANZ) is now the third bank of the four big banks to forecast not one, but two cuts to the Reserve Bank of Australia’s (RBA) cash rate in 2015.

Westpac and National Australia Bank (NAB) were the first to the party with their predictions of weaker growth and lower inflation, driving the cash rate down to two percent. Commonwealth Bank is singing a different tune and expects the cash rate to remain steady at 2.5 percent throughout the year.

Central banks tend to send conflicting messages to keep as many people happy, and guessing, as possible. If you review the minutes from the RBA’s December meeting, there was talk about growing expectations for a rate cut, and also a conviction that Australia needs a period of stability in interest rates. Try to figure that one out. Either way, at least they can say that they were right.

The RBA Cash Rate: Why You Should Care

The RBA exists to provide liquidity, which means the availability of money, to the Australian government and its people through the banking system.The RBA’s stated goals are to keep currency stable, maintain a high level of employment, and promote the general welfare and prosperity of the Australian people. They plan to do this by keeping inflation in the two to three percent range.

RBAThe RBA accomplishes these goals primarily through intervening in the economy by manipulating the cash rate.

The cash rate is the interest rate on overnight loans in the money market. This is the rate that Australian banks and intermediaries charge one another for the short-term use of funds.

If the RBA wants a lower cash rate, it will increase the supply and availability of money, making money less expensive, creating a lower interest rate.

Conversely, to increase the cash rate, it will decrease the supply and availability of money, making it more costly, producing a higher interest rate. This is nothing more than supply and demand economics 101.

This manipulation of the cash rate has a powerful knock on effect for interest rates in the broader economy. When the cash rate drops, banks pay less for overnight access to money. They, in turn, need to charge their customers less in order to make the same amount of money. In other words, your mortgage payment should be theoretically lower when the cash rate drops.

A Brief Look At The Historical Data

At 2.5 percent, the current cash rate is the lowest in history. It has remained steady at this level for the past 16 months of RBA meetings. This has translated into mortgage rates in the 4.5 to 5.5 percent range. However, if you go back to 1990, the cash rate was a whopping 17.5 percent. How would an interest rate like that impact the cash flow on your rental property portfolio today? You can have a look at the data for yourself here.

Lower Cash Rates And Your Mortgage Payments

Lower Cash RatesDoes a lower cash rate mean your mortgage payments will go down? Well, that’s the idea.

But it doesn’t always play out that way. You can bet that if the RBA raises the cash rate, your bank will pass that increased cost onto you.

But when the RBA lowers the cash rate, the banks decide whether or not they want to keep their profit level the same, or increase their profits by pocketing their savings.

As a result, banks do not always decrease their interest rates in perfect correlation with decreases in the RBA’s cash rate.

Why not? Well, because the free market says they don’t need to. If you owned a business and your costs went down, but people were willing to keep paying you the same amount that they had always been paying, what would you do? Until you faced a backlash, you’d probably keep charging the most you could to enhance your profits.

Between November 2011 and March 2013, the RBA lowered the cash rate from 4.75 percent to three percent. Over that time period, the big four banks pocketed almost an extra $1 billion each in additional profits from not passing on interest rate cuts. Can you blame them?

lower interest ratesOf course, this really made a lot of people angry. By May of 2013, the big banks were rushing to lower interest rates as they sensed the tide of public opinion turning against them.

Citing decreases in overseas funding costs, the chairman of the Australian Competition and Consumer Commission was quoted last year, going so far as to say, “We’re owed an interest rate cut,” from the big banks. And this is after many months of the RBA keeping the interest rates steady. Many Australians would probably agree.

The fact is, banks owe us nothing. Bank policy makers exist to increase shareholder profits. They will set interest rates at whatever level will promote this objective. If the competitive environment will allow them to keep interest rates higher, that’s what they will do.

The answer is not to moan and complain about what’s unfair, but to enforce what competition does exist to make the market more efficient.

Take Matters Into Your Own Hands

I wrote a few months ago about one of the students I coached in Steve’s Property Apprenticeship course who took matters into his own hands, and lowered his own interest rate.

He had his loans with a traditional bank at an interest rate of 5.3 percent. After doing some research by speaking to a few mortgage brokers, he learned which lenders were offering the best rates.

Armed with this information, he went back to his bank to sit down face to face with one of the lending managers.

He simply showed him what his options were in finding cheaper finance with another bank, and they instantly lowered his interest rate to 4.9 percent. This 0.4 percent decrease in interest saved him an additional $1,560 per year.

What Do You Think?

Will the interest rates go lower in 2015, or will they remain at current levels? When do you expect the next rate rise? Take a moment to leave your thoughts in the comment section below.


Profile photo of Jason Staggers

By Jason Staggers

Jason was a personal mentor working with Steve McKnight's Property Apprentices. He helped hundreds of investors apply Steve's teachings in the real world and achieve greater results on their journey to financial freedom. Jason now lives in Perth, WA where he leads Neuma Church.


  1. Profile photo of DeanCollins

    Hi Jason,
    Great article. The real problem with Australian punters is that the moment interest rates are lowered… prices rise because people think….you beauty I can afford to spend more.
    The problem with this is rates can go back up in 12 months……most mortgages last 25 years.
    It would be nice if in the next 0.25% interest rate drop in 2015 owners AND investors went you beauty……I can afford to go to the footy and spent the extra $1250 on themselves and their family…….


    • Profile photo of Jason Staggers

      Thanks for sharing your thoughts @DeanCollins. When I first moved to Australia from the States back in 2003, I was amazed that there was no such thing as a 30 year fixed rate mortgage. Australian investors therefore must remain focused on mitigating interest rate risks as you’ve said. We’re at historical lows which means the future will likely mean higher interest rates. I’m posting a follow-up article on this topic this week.

  2. Profile photo of Don Nicolussi

    Thanks for the article Jason. Stating the obvious we know that interest rates will rise and fall.

    As investors it is our primary job to concentrate on the underlying quality or every potential investment rather than the short term cost of funds.

    As you have indicated in your article we have full recourse mortgages in this country unlike the US where I am told you can simply hand back the keys or what banks call “jingle mail” (owners post the keys back to the bank) if things get too hard. Here we have the double whammy of variable cost of funds and personal guarantees.

    We have an inherently more stable property market because of this. IMHO.

    Rates: You nearly got me! :) Not making a prediction but I do have a strategy in place to manage my funding costs. Rather than be a passenger I would rather drive.

    • Profile photo of DeanCollins

      Don, sorry but that’s not why Australia has a more stable market. After living here I can tell you the reason is simple……in the USA there are more places to move to.
      It really is that simple.
      In Australia where are you going to move to….you live in Sydney you ‘might’ move to Mel/Bris….very rarely but possible Adl or Perth.
      In the USA if you live in San Diego you can move to any of 30 other major cities…..and people do…..often.
      Its this sloshing around of the population that causes movements (likewise the additional population).

  3. Profile photo of janecav

    Wow, that is a great story about your client who shopped around for a lower interest rate. I think I’m going to do that – I do love bargaining with people! Especially when you’ve got nothing to lose.

    Thanks Jason for explaining some economics in an easy to read fashion – it makes it really interesting.

    Also, unrelated, but I think the Reserve Bank logo looks like it could be an alien biohazard symbol!!

  4. larry looper

    receive and without the pension perks

    How about sparing a thought for self funded retired people,some who are living on less money that a pensioner gets.all because interest rates are to low.

  5. larry looper

    How about sparing a thought for self funded retired people,some who are living on less than a pensioner gets all because interest rates are to low.And without the perks a pensioner gets.

    How about sparing a thought for self funded retired people,some who are living on less money that a pensioner gets.all because interest rates are to low.

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