Fixed or Variable?

Graeme Salt

One question that clients often ask mortgage brokers is if they should choose a variable or fixed home loan. Generally, clients who choose variable loans tend to come out better than those with fixed rates (and that is before taking into account fees for breaking fixed loans). But, for some time now, fixed rates have been significantly below variable loans - with many home buyers taking advantage of low borrowing costs, especially as some 2-year loans are as low as 4.99%. Borrowers are only quids-in if the fixed rate stays below variable rates and here is the problem; economists cannot agree on whether the next interest rate move will be up or down. Over the remainder of 2013, the median forecast is for the cash rate to fall to 2.75%, according to the latest Bloomberg survey of bank and financial institution economists. However, forecasts vary significantly. For example, HSBC’s Paul Bloxham’s believes the cash rate could rise by 25 basis points to 3.25% whereas Macquarie’s Richard Gibbs expects the cash rate could fall 100 basis points to 2% over the course of the year. Ten economists expect no change over 2013 and the cash rate remaining at 3%, including the Commonwealth Bank’s Michael Blythe and AMP Capital’s Shane Oliver. Seven economists foresee two more rate cuts this year (2.5%), including ANZ’s Warren Hogan. Looking beyond 2013, and the lack of consensus is even greater with forecasts varying from a cash rate of 2.5% (ANZ Bank and FIIG Securities) to as high as 4.25% (Laminar Capital) by the end of 2014. This leaves homeowners, none-the-wiser. Thankfully, there is an option; most lenders offer split loans, where part of it is fixed and part of it is variable. If you want to hedge your bets, a split loan may well be the way to ride interest rates up or down.