In 1990, homeowners were paying a 17% interest on a mortgage. Today, we are looking at historically low interest rates, these rates are unheard of. They are so low that I have to stop and think when I give a client a rate quote.
With rates at the lowest levels in history why are so many people reluctant to lock in these great rates for the years to come.
Speaking to a lot of clients I think the reasons come down to just a couple of main points:
To be able to make the right decision for yourself it is important you have some understanding on how the setting of how variable and fixed interest rates actually work.
The decision on the cash rate (variable rates) is set by the Reserve Bank on the first Tuesday of each month. The Reserve Bank’s job is to foster stability in our financial system. To do this they focus decision making on keeping inflation to around 2-3%. Next is watching key indicators of a growing or slowing economy. Some of these indicators are unemployment, Gross Domestic Product (GDP), consumer and business confidence.
If the economy is growing too fast causing inflationary pressure the reserve bank will increase the cash rate to slow the economy. But when the economy is slow then interest are lowered to increase spending.
Fixed rates however move independently of variable rates and move based on the longer term outlook of the economy. We can even have the situation where variable rates are going down while fixed rates are increasing. If fixed rates are higher than variable rates then it is an indication that the market believes variable rates in time will follow suit.
At the moment the Australian economy is growing at a rate below its historical average but more recently there have been signs of an improving economy. Overseas the United States Economy has been doing well although there are still signs of issues in Europe.
We can see this improved outlook already through the pricing of the fixed rates offered by many lenders. Only a couple of months ago we saw banks like ME Bank and BOQ offering 3 year fixed rates of 3.99%. Both Banks have now increased their fixed rates and, we have seen many other lenders increasing their fixed rates and at the same time sharpening their variable rate offerings. Fixed rate movements can and are announced at any stage through the month and from our evidence are definitely starting to increase with a more positive outlook for the Australian economy.
The current 2% cash rate is certainly supportive of an economy that has room to grow and there is plenty of room to increase interest rates if the economy starts growing quickly and they need to slow down the speed of growth. On the downside I think the RBA would be reluctant to decrease rates further unless we see significant deterioration in the Australian economy. After all the RBA wants room to move if they actually need to stimulate the economy.
If fixing your interest rate suits your situation than I believe you should probably consider locking in right now. After all both fixed and variable rates are the lowest we have seen in history. Fixed rates in many cases are lower than current variable rates on offer and I can’t see variable rates remaining this low for the next 3 to 5 years. There is not much more room for rates to go lower but there is a lot of room for rates to go up if the economy does really kick into gear. And when the economy does speed up the fixed rates will already be higher before you know it.
If you would like to discuss if fixing your loan is the right option for you then feel free to give us a call on (07 5522 9522) or drop us a message on the form below and we can call you back.