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Banking on a future interest rate fall

The future direction of interest rates has become less of a contentious issue in recent times. As consumers continue to take cover from the latest share market fallout and await the much anticipated impact of the carbon tax on our hip pockets, more economists are tipping a drop in interest rates as the Reserve Bank’s next move.

With the RBA meeting in the first Tuesday of the month (tomorrow) we’ll soon know which way rates are heading.

But as suggested in a Sydney Morning Herald article, the only opinion that truly matters to borrowers and their household budgets, is that of the banks.

Fixed rates falling

A good indication that lenders are anticipating a fall in the official cash rate is the recent move by 14 lenders to cut their fixed rate mortgages by as much as 0.45 per cent over four and five year terms.

Some of the largest moves were from Homeloans, cutting their one and two year fixed rate products by 0.4 per cent and 0.65 per cent respectively, while MyRate’s one and two year fixed rate mortgages fell by 0.4 per cent and 0.6 per cent. Not to be outdone, Bankwest slashed 0.45 per cent off their three year fixed term rate, and over four and five years Morgan Brooks and the Commonwealth sliced 0.81 per cent and 0.55 per cent off their rates respectively.

Why such a bold move?

Simply put, they were suddenly paying less to borrow money themselves as investors traded equities for bonds and thus caused the latter to rise in value. And when bond prices increase, their yields fall, thereby reducing the banks’ borrowing costs.

Interestingly, these cuts have actually seen the retail rate on fixed mortgage products dip below the average standard variable rate, which remains unchanged at 7.45 per cent. Now, borrowers can secure fixed term mortgages at an average of 7 per cent for one year, 7.1 per cent for two years and 7.18 per cent for three years.

Of course by opting to lock in your loan, you are essentially calling the lenders’ bluff and hoping the official cash rate doesn’t drop too much in the next two to three years, taking the average variable rate along with it.

With the economic outlook so shaky at this point in time, you might be tempted to lock in your rates, but the experts I’ve been speaking with expect rates to fall further.

Rolf Schaefer of Metropole Finance  suggets only considering locking in to a fixed rate when the 5 year fixed rate drops below 6%. And then only fixing portion of your loans.

What do I think will happen to interest rates?

If rates don’t fall in September, they are likely to in October and again a few times over the next year or so as the RBA attempts to stimulate our economy.

But then over the next few years rates are likely to rise again as inflation increases. It seems that we are bound to enter an inflationary period, with our resources boom fuelling the economy, the Australian dollar dropping (which imports inflation) and America trying to work its way out of it’s recession through inflation



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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