Today I went back into the home loan market for the first time in quite a while. It's an unusual step for someone who is debt averse and who actually sold their home last week!
Let me explain.
I was contacting the bank to discuss some commercial matters and noticed that multi-year fixed rate home loans are now being advertised under 2 percent.
This is much cheaper than the commercial loan facilities that my businesses uses. My plan is to borrow at the lower residential rate and use those funds to reduce my commercial gearing.
It's effectively risk free and I benefit from the interest differential.
But there is also another motive and that is to lock funds in at an acceptably low rate to provide some certainty for the future.
Here's my thinking.
If rates go lower and I am stuck with a sub 2% interest rate it isn't the end of the world. It's affordable and having it locked in for as long as five years provides certainty in an uncertain world.
It's also because I have some expectations of my own.
While I think official rates will remain low for quite some time, the real market rate is likely to rise much higher and faster than many expect.
The real rate is the interest rate demanded by people who are prepared to lend it. They want adequate return for the risk of possibly losing their money.
As the money printing presses roll on around the world, cash has little value and so it needs to be deployed into performing assets.
Lending money at 1 or 2% isn't really an attractive proposition for many as the slightest whiff of inflation and they'll be going backwards financially.
My expectation is that real rates will rise while official rates remain where they are. I expect that to start to play out in 2021. That theory seems to be reflected in the US bond market too.
The yield on 10 year bonds jumped to from around 0.8% to 0.95% last night. That's a big move in the bond market and signals expectations of future rate movements.
To me, this is one of those asymmetric bets that I love to find.
The downside is limited ( to wherever rates fall to) while I could save a lot if rates do begin to rise. If you told me five years ago I could borrow money at an interest rate with a one in front of it, I would have said you were crazy.
Maybe this is just more evidence that things are even crazier than I thought they could be.
Cory Bernardi is the author of seven books and has been a member of the Australian rowing team, a publican, an investment portfolio manager and spent nearly 14 years as an Australian Senator.
