Is this as low rates can go?

Graeme Salt

This week, Citibank economists said there would be no further rate cuts. Given that Australian home owners have enjoyed record low interest rates, it begs the question is this as good as it gets and should they lock in these low rates now?


Economics is known as the dismal science because there is so little agreement by economists on the facts – and not all economists agree that the rate-cutting cycle has stopped; certainly Westpac’s Chief Economist is still predicting a November rate cut.


But, there is general agreement that we are close to the bottom of the rate cycle, even if we are not at the very bottom.


It is always a dilemma for my clients as to whether their home loan should be on fixed or variable rates. Whenever choosing between the two and wondering which way they are going, it is best to do a quick comparison. Generally speaking, fixed rates tell you where variable rates are going to go. If fixed rates are cheaper than variable, the next move will be down. More expensive fixed rates indicate rate rises are on the way.


My lowest fixed rate is 4.44 per cent, whereas my lowest variable is 4.75 per cent – this would indicate that there are still rate cuts on the way. Fixed has been cheaper than variable for quite some time.


But now I am starting to hear off-the record conversations from lenders that they will soon start ratcheting up their fixed rates. This tells me that, if there is a rate cut coming, it will be the last one.


So, if you are buying a property, what should you do with interest rates?:


  1. If you lock in the fixed rates now, you have certainty of what your repayments will be (and you will have got this certainty at an historically low rate though rates could still go down before they go up)
  2. If you opt for a variable rate, you are taking your chances (good and bad). You could benefit you will benefit from further cuts, there is also a risk that you will be having to accommodate rate rises too
  3. Splitting. A client of mine recently opted to fix two thirds of her loan and had the remaining portion. She did this knowing she was hedging her bets.

For a complementary review of your home loan needs, please call Graeme on 02 9922 5055