Is it the time to fix interest rates?

The Reserve Bank has cut interest rates to their lowest point in more than 45 years, and is tipped to reach a record low of 2 per cent by midyear.

Due to the Reserve Bank of Australia having slashed rates aggressively the popularity of fixed-rate loans has collapsed to a record low last year. Still, some families were paying interest rates of more than nine per cent while others on variable rates saw their mortgages drop.

Fixed mortgages are now seen as possible insurance against a surprise rise in rates.

John Symond executive chairman and founder of Aussie Home Loans said that the overnight cash rate would hit two per cent by the middle of 2009; down from the present 45-year low of 3.25 per cent. He further added that he believed the cash rate would go down to 2 per cent within the next three to four months.

The official cash rate had never reached this level since the RBA was legislated in 1959.

Mr. Symond felt that with interest rates on home loans now also at four decade lows it was starting to look like a good option to fix interest rates again, as we were getting very close to where fixed rates might be very appealing. He felt that if people could lock in a fixed rate within half a percent of record lows, that they had done very well.

David Kaplan a director of Rate Detective said that there was no guarantee that interest rates would not rise again unexpectedly, which made fixed-rate mortgages a compelling choice. He further suggested that anything could happen with interest rates over a three-year period.

Rory Robertson interest rate strategist with Macquarie Group felt that interest rates were likely to hit 2 per cent later in the year rather than by mid-year because he believed the RBA would cut rates by smaller margins than it had recently and rate cuts would be delivered more than one meeting apart.

Interest rates could fall to three per cent by March, which would be the lowest cash rate since early 1960.

With fixed-rate loans now holding a record-low share of the mortgage market, lenders are offering cheaper mortgage rates to entice borrowers away from the lowest standard variable mortgage rates since the 1960's.

St. George is currently offering a fixed-rate mortgage rate of 5.64 per cent, set for three years. This rate is only marginally lower than the 5.7 per cent standard variable rate offered by NAB and Commonwealth Bank.

The fixed-rate mortgage would be attractive if rates were to rise again in the next three years, and drove up standard variable rates.

Australian Bureau of Statistics data has shown that just 2.5 per cent of new borrowers chose a fixed-rate home loan, set for two years or longer, in November.

Between March and August more than 43,000 unlucky borrowers locked themselves into fixed rate home loans, charging more than nine per cent interest because they thought rates would keep rising as inflation soared.

Tuesday's rate cut took the cash rate to a 45-year low of 3.25 per cent, and standard variable home loan rates below six per cent for the first time since the 1960's.

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Published on February 2-th, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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