Economic Wrap

Interest rates have now risen for the third consecutive month bumping up the cash rate by three quarters of a per cent since its low of 3 percent between April and September 2009.

But for most homeowners, mortgage rates have increased above the cash rate level as the banks have looked to offset the impact of higher funding costs at the expense of the borrower.

This is a concept that is confusing for borrowers because there is an expectation that the Reserve Bank of Australia (RBA) dictates where interest rates should sit - and in normal circumstances that would be the case.

Unfortunately we are still not in a 'normal' market as far as funding is concerned. Though Australia has well and truly sidestepped the recession that has gripped much of the developed world, our banks and financial institutions are still very much dependant on the international money markets for our mortgage funding.

You may wonder why we depend on the financial markets at all for mortgages - surely the banks bring in deposits through one door and lend them through another? The reality is that today there are fewer savers out there than there are borrowers and so the banks must look elsewhere
to fund their customers' property purchases.

But while the December rate rise may have hit us a little harder than expected there may be a silver lining.

One of the reasons the RBA increases rates is to cool consumer spending. With the banks bumping rates up even higher there is a reasonable chance that the cash rate may stay at its current level for a while longer.

The reality is rates are still at historic lows and there is a fair way for them to go before they reach normal levels. While we hope that this transition will be a slow one, it makes sense to start factoring the potential for higher repayments into your budget.

Your first port of call should be to target reducing any high interest debts such as credit cards and store cards. If you're concerned about your debt levels, or are unsure what rates you are paying, feel free to give me a call to discuss.