yonglonglai.com

Just received this link in an email from a friend! Thanks Kristan! It s a very interesting article that must be read by all (especially if you have a home loan and/or are planning to borrow money in the future)

http://www.theaustralian.news.com.au/story/0,25197,22808650-643,00.html

I ve been keeping a very close eye on the interest rate over the past few months and if you check the major bank s website you will notice that they are definitely increasing interest rate higher than the official 0.25%

Why is this happening?
Simply because the credit crunch is affecting Australia s economy! Here s some background to the banking system.

• Banks source their lending from two sources, the wholesale market (US, UK etc.) or depositors. (That s why you have stuff like savings account, telenet saver etc. Major Banks can lend all these money out!)
• Non Bank lending can only source their money from the wholesale market.

Ie. Banks have an advantage over non-bank lenders because they have an additional source to fund their lending.

What s the problem then?
When bank cannot fund all the lending they are doing they have a few choices (especially if they want to keep their profits up):

• Stop lending (not wise)
• Borrow from more expensive source of money (cost of funding increase)
• Cut cost (short term gain for long term pain)

Banks making statement such as the one in the article simply means the credit crunch must be hurting their bottom line. Increase interest rate will help slow down the rate of borrowing which may cause some or all of the following:

• More businesses will not fund future project due to increase borrowing cost
• Economy will contract (shrink)
• Less money flow in the economy
• Retrenchment
• Cost cutting in companies (so that you can keep profits up)
• Less revenue/sales because since there is less spending (capital
• expenditure which are usually funded from borrowing)
• etc (you get the picture)

From my previous comments, I hope you remember what happens when interest rates goes up! If not, read this again! Click Here