"We have to be very careful here in a hot market"
Australians should take the opportunity to pay down their mortgages as much as possible while rates are low, according to the head of a major bank.
“We have to be very careful here in a hot market that those people who are borrowing money today can not only borrow it at today’s rates, but can borrow it at rates that will be higher in the future,” National Australia Bank chief executive Ross McEwan said in an interview with The Australian. “Because as we know, rates go up and rates go down. Never be thinking that rates will stay at this level forever.”
Ten- and 15-year bonds were already starting to “tick up,” McEwan said. However, he said he was confident that rates would stay low until at least 2023 or 2024.
“After that, rates may well go up, and we need to be careful that people can afford the borrowings they are taking today,” he said.
McEwan told The Australian that borrowers should pay down their debt now, while rates are low.
“This may be strange coming from a banker, but when interest rates are really low, that is a great time to be paying off the principle of a mortgage and your other borrowings,” he said. “That’s the message I’d give people. While interest rates are low, pay down as much of the principle as you can so when interest rates do go up … you’re in a much, much better position.”
McEwan’s advice comes as confidence increases among economists that the end of JobKeeper this month won’t spark a significant economic downturn. That confidence is driven largely by the booming property market, along with a resurgent retail market and the more than $120 billion in additional savings Australians have accumulated during the COVID-19 pandemic, reported.
Read more: NAB slashes home loan rates
Economic momentum is being driven by auction clearance rates, which hit more than 80% in every capital city this weekend, while mortgage brokers said that every region in the country was seeing increased buyer interest.
Treasurer Josh Frydenberg is considering offering targeted support – including grants for the aviation industry and the extension of incentives to employ trainees – following the termination of JobKeeper at the end of the month. However, New South Wales Treasurer Dominic Perrottet is urging the federal government to end the wage subsidy.
“We cannot make decisions today that impact generations to come,” Perrottet said.
Commonwealth Bank estimated that Australian households have saved $120 billion more than what is usual for the June, September and December quarters – equivalent to 6% of gross domestic product – as overseas travel and social activities were scaled back due to the pandemic. CBA analysts believe that money will spur economic momentum as it is spent over the next few years.
“I think a good chunk of it will find its way into consumer spending – households will smooth consumption over a few years by drawing down on some of the accumulated savings,” Garth Aird, CBA head of Australian economics, told The Australian. “There will be a boost on services spending in 2021 in particular and some of that will be funded from savings accrued in 2020. In addition, some of the savings will be used to pay down debt and some of the money may go into other assets – housing or equities, for example.”
