Written by: Nick Bregozzo

Economists are now tipping interest rates are likely to increase before Christmas. This week saw newspaper headlines proclaiming that the ”party was over” and ”good times” were at an end for mortgage holders, but is it a fair assessment to describe the last 12 months as a ”party” for mortgage holders? It’s a fact that the Reserve Bank aggressively cut interest rates over the last 12 months, partly to quell inflationary pressures placed on the economy (as households suffered under the increased cost of power),…  and partly to increase demand in the struggling retail sector.

There are only one or two economists brave or radical enough to suggest the RBA continue on its drive to cut interest rates in order to reign in the Australian Dollar with the view that this would provide the necessary panacea for our decimated manufacturing sector and provide the necessary adrenaline boost to the retail sector. The suggestion here is that whilst there is a general acknowledgement that the easing of interest rates has been helpful, the impact hasn’t been as effective as well it might be.

Any discussion on interest rates inevitably leads to a comment about how the reaction of the big four banks to any RBA decision on interest rates, specifically whether they will elect to act independently of the central bank.

Over the last six months or so the banks have been fairly blatant about their desire to act independently from the RBA. For consumers and especially mortgage holders, this is a worrying trend as is signals to the economy that any RBA policy decision on interest rates could be muted by the banks refusing to pass on any cuts.

Under such circumstances, the average mortgage holder must feel a bit short changed and question the point and effectiveness of the RBA. Perhaps in Australia, the banking sector is not as competitive as compared to other economies. Sure, the Federal Government introduced stricter lending regulations and consumer protections, but in concert with all the good this delivered, this also saw a contraction in competition.

Credit Unions were supposed to fill the beach as Treasurer Swan described them as a ”fifth pillar”, but this didn’t happen and now we, as consumers are faced with very little choice when it comes to change.

Have things gone too far? Has the increase in regulation resulted in less competition? Sure, it may be easier these days to swap lenders, but if the alternative provides similar financial products because of the lack of competition in the marketplace, swapping lenders provides very little benefit.

Naturally this is always one or two exceptions to the rule. One that comes to mind is when a borrower has a mortgage with a second tier lender and refinances down to the standard variable rate after demonstrating good compliance history at the higher rate. This scenario is fairly common and serves to perpetuate the contraction of the lending markets in terms of competition as non-bank lenders lose market share.

At first glance one would think this is a good thing - the consumer now has the opportunity to enjoy a cheaper interest rate, right? Whilst this may be true, the big picture result is the dwindling relevance of the non-bank lender as their market share erodes. The short term gain of the consumer is replaced by the reduced competitiveness of lending market and ultimately less choice for that same consumer.

Last week the RBA urged Aussie households to ”continue to bolster” savings in what many have interpreted as a precursor to a return to ”normal” interest rate levels. Could this be an early warning signal to those struggling with debts? We believe so.

The message here is that if you are struggling with debts now, and interest rates are at record lows, when interest rates increase there will be a problem.

Now is the time to examine your debt levels, and rather than save the money, use any excess cash to pay down debt. The reality is that there is most likely an increased benefit to you by paying down debt as opposed to any interest rate benefit you stand to gain from saving deposits.

If you have high interest rate credit cards, consider swapping these for lower interest rate cards and examine the benefits that debt consolidation provides. You should consider speaking to a debt consolidation expert for a balanced opinion of your finances and plan for a debt free future.

If economists and social commentators predict comes to fruition, we should anticipate an interest rate rise or two before the end of the year. Between now and then, you need to ask yourself if you ready and how this would impact you. Review your budget, address your debt position and make plans to minimise the impact