My Wife's Bottom

Graeme Salt

My wife’s bottom is one of my favourite views in the whole world. It’s so good I reckon it is up there with the Sydney Opera House and the Eiffel Tower.


But, I don’t like all bottoms. One bottom I don’t really like is the bottom of a rate-cutting cycle. And we are getting very close to the bottom for interest rates.


Sure, rates have to go up when the economy is getting ahead of itself. But, the result is that clients find it harder to get a loan and, consequently, harder to buy a property.


This week, most of the well-known names increased their fixed interest loans. It wasn’t a huge increase (ING, for example, increased its three-year fixed by 0.05 per cent). But many economists think that there is more to come for fixed interest loans.


For variable loans, the near future is rosier. Few economists can see an increase on the horizon and some are still predicting cuts in 2014.


Now, some thing that many people don’t understand is that fixed and variable interest rates are determined differently. Fixed interest rates are determined by the global money markets. So, with the global economy slowly picking up and the Federal Reserve saying that, at some point, it will reduce the amount of money it needs to pump into the economy, the price of money will increase – in simple terms that means that fixed interest rates will go up.


But, variable rates are primarily determined by how the Reserve Bank of Australia (RBA) sees the Australian economy. And the Reserve has consistently said that the Australian economy is growing “below trend.” If it will change anything, the RBA will reduce its cash rate which will lead to a drop in variable interest rates. So, if you are looking to take out a mortgage, what do you do? Two recent client experiences give us good advice:


  • Andrew is much cleverer than me. He works with money and correctly predicted a while ago that fixed rates would start to creep up. But he also felt that there was one more cut in variable rates. I was refinancing his Glebe home to Macquarie Bank. Andrew decided that he would take his chances with variable rates, knowing that most people tend to do better with variable than fixed over the long run. Deb is also someone I recently refinanced. I took her from Bendigo Bank to St George when she wanted to get a better rate and get some cash for a new kitchen.


  • Deb wanted the certainty of knowing what her interest repayments would be so she opted for a fixed loan. She also wanted the certainty of knowing that the fixed rate she applied for was the fixed rate she got when the loan settled. So, for a nominal fee, she paid to lock-in her interest rate. Deb has done really well because, since she applied for the loan, interest rates have gone up. But she is still make repayments at the lower rate.


Fixed rates may well have reached to bottom – but that does not mean you have got a bum deal.


If you want to discuss your home loan needs (and not my wife's bottom), please call me on 02 9922 5055