So my 12 year old daughter asks, "Why is it that any time there is good news about the cheaper they also say that there is pressure on mortgage rates to rise? Why does the good news also mean bad news?"
A fair question in my opinion. Scan the headlines - "Jobless Numbers Down - Pressure on Mortgage Rates", "Promised Tax Cuts may see increase in Mortgage Rates", "Third Successive regular Economic increase figures see Mortgage Rates set to Rise". Then, of course, there are other factors totally out of our control which can also affect mortgage rates such as the new global liquidity and prestige urgency emanating from the Us economy.
Calculate Mortgage Interest
Mortgage rates are influenced by the legal interest rate or Target Cash Rate as set by the support Bank. When the support Bank changes the legal rate and in turn, mortgage rates, it is attempting to affect expenditure in the economy. When expenditure exceeds production, inflation results. Therefore mortgage rates are used as a tool to control inflation as a part of monetary policy.
Higher mortgage rates affect borrowers' cash flows and sacrifice the number of money that consumers are able to spend on goods. Lower mortgage rates have the opposite effect. And because lower mortgage rates mean that population have more to spend it puts pressure on prices due to increased question it puts further inflationary pressures on the economy.
In the dizzy days of the late 1980s inflation was rampant and mortgage rates peaked at 17% per annum. The high mortgage rates severely wee housing affordability. Since those days governments and the support Bank have tended to micro carry on the cheaper to avoid major peaks and troughs. Small increases in mortgage rates, although politically unpopular, are an effective means of stabilising the economy. A wee research into the history of mortgage rates in this country will describe that, at current levels, they are still relatively low.
It should be noted, however, that when we talk about mortgage rates we are ordinarily referring to "nominal" mortgage rates (as nominated in loan contracts, advertising etc). Economists, on the other hand, talk in terms of "real" mortgage rates. So what is the disagreement in the middle of nominal and real mortgage rates? Real mortgage rates take into account the ensue of inflation so that Real Mortgage Rates = Nominal Mortgage Rates minus Inflation Rate.
In 1989 when the nominal mortgage rate was 17%, inflation was running at almost 8% per annum. Therefore the real mortgage rate would have been 9% per annum. Today nominal mortgage rates are almost 8% per annum and inflation is running at nearby 2% per annum so that the real mortgage rates are 6% per annum.
In fact if we research real mortgage rates in Australia over the last 25 - 30 years we find that they have hovered within 2% per annum and 10% per annum, compared to nominal mortgage rates which have been in the middle of 6% per annum and 17% per annum over the same period. Obviously it is much sexier for politicians to spruik about weighty reductions in nominal interest rates.
So in summary, to sass my daughter, an occasional wee pain with mortgage rates may lead to a huge gain in the broad scheme of things.
Mortgage Rates Calculate Mortgage Interest
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