The reduction in fixed interest rates for home loans is providing a fantastic opportunity for existing borrowers to re-finance and lock in a rate for up to 5 years. It is also an opportunity for those who can draw on equity in their property to create wealth by investing in property or shares.
Some analysts are predicting that the yields on 10 year bonds may fall below 3.0%, and if the banks continue to maintain their NIM (Net Interest Margin – Simply this the difference between the deposit rates and lending rates) of around 2.2%, while the cash rate remains at 2.5% or even falls to 2.0% (not likely see next point), then a 5 year fixed at 4.99% is very attractive. Variable rates are around this level of slightly lower depending on the bank.
Even with a little inflation it is not likely the RBA will increase rates in the foreseeable future as it will put more upward pressure on the dollar, and as everyone knows the RBA wants the Australian dollar to fall. This upward pressure will continue so long as Quantitative Easing (QE) continues to be undertaken by the US, Japanese and European Union. A goal of QE is to devalue your currency. Equally, the RBA is not likely to reduce the cash rate any further, as it wants to keep its monetary policy options open. They have watched and learned from the experiences of the US, Japan and other countries where the central banks have reduced interest rates to zero or close to it.
So what does all this mean? The bottom line is that the interest rates for the long end (5-10 year instruments, e.g. bonds) of the yield curve may fall, but the short end (cash rate) of the yield curve won’t. So those variable rate home loans that are priced off the cash rate won’t move down, which makes a 5 year fixed rate very attractive, particularly if you can get returns of 7-12 % per annum on the property/equities market on average over the 5 year period. Fixing also provides interest expense certainty.
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