Risks & Opportunities

Like many things in life, risks & opportunities present themselves by actions or inactions. How we respond to these challenges determines much of our personal temperament over an extended period. We now need to adjust our lifestyles back to a realistic level of 20 years ago before the big debt and equity bull market started.

For those of us with mortgages, the constant talk in the press concerning whether the Reserve Bank of Australia [RBA] will or won’t adjust the cash rate dominates our “front of mind” thought processes. When the inevitable decision is made by our current lender to pass all or some of the RBA cash rate adjustment on, we then become further agitated by press coverage demanding what the banks should pass on.
Passionate headlines, conspiring commentary, and rehashing statistics of what the CEO gets paid are regurgitated to remonstrate those who take these decisions.
The economic reality is the world, and more specifically Australia, needs strong & well capitalised banks. Some finer points for closer consideration are;
  1. What many are unaware of is in countries like the US & UK, banks aren’t lending unless you have a 40% deposit, sometimes more. In Australia we can still borrow up to 95% and many still do.
  2. Our property prices have remained relatively stable [less than 10% discounts off the peaks of 2006 & 2007].
  3. We still have competition between banks even though the competition has reduced in numbers.
  4. Our government hasn’t had to nationalise any banks to protect deposits and to stop a run on these banks.
  5. For most of us who want a job, we can get one. Our unemployment rate is rising but the UK & US have unemployment rates exceed 9 or 10%.
Yes, we all want to pay as little as possible on our mortgages but we also need to understand that interest rates, like property & the stock markets go through cycles, both up down. Short term adjustments are appreciated but can’t be relied upon for long term life style sustainability.
As referred to above the, opportunity to reduce your mortgage amount quickly in a falling interest rate environment should be accepted if your cash flow is strong enough to maintain existing repayments & conversely when rates rise, as they will, we need to accept the risk that if we don’t change our repayment patterns we eventually get further behind.