While the Reserve Bank is playing nice before Christmas, with many predicting that they’ll keep official interest rates on hold until next year, it looks like the banks will be struck off Santa’s gift list as they play naughty.

It’s expected that a number of the big banks will flout the RBA’s decision to maintain cash rates at their current level (4.5%) during their August 3rd meeting, in favour of an increase in retail rates intended to offset increased funding costs and declining profit margins.

While the banks’ net profits have been in the billions for the most part – as recently reported by the CBA – lenders are now contending with a rise in funding costs as a direct result of the GFC, which forced them to seek more expensive, largely offshore funds. This, combined with the banks competing for business by offering enticing savings deposit rates (in some instances higher than the home loan interest rate), are both taking a toll on banking profits…and we all know how much banks like a good profit!

As discussed in our feature article this month, now might be a very opportune time for borrowers to consider fixing a portion of their debt, before the banks make their inevitable move.

I’m not really a betting man, but odds are pretty good that the experts’ predictions will be realised sooner rather than later, and hedging some of your debt against not only the banks’ impending interest rate rises, but the RBA’s (we all know they won’t be this low forever), isn’t such a bad idea. 

Here is a small snapshot of some of the more interesting transactions we’ve seen over the past few months.

Settlement Date – 3/05/2010

Client – Local Canberra – 1550

Purchase type – Investment

Purchase price – $642,000

Transaction type – off Market – private treaty – used a buyer’s agent to acquire

Suburb – Coogee, Sydney

Property Type – 2 bed apartment + study

Attributes – big block of land with only 12 apartments on the site and communal BBQ area set high on the hill, single lock up garage. Only 400m from waterfront with views of Coogee beach. The client undertook a $26k renovation that included a new laundry (new flooring and installation of a washing machine/dryer combo), built in linen cupboard, new cooking appliances, fresh paint, new robes with mirrored doors and replaced ceiling. The kitchen and bathroom had already been recently updated. The apartment was tenanted in the middle of winter for $550pw, with a 15 month lease, so the property can be re-let during the peak summer period. This is a well located property purchased for capital growth potential.

Settlement Date – 09/06/2010

Client –Local – 1998

Purchase type – Investment

Purchase price – $500,000

Transaction type – On Market private treaty – used a buyer’s agent to acquire

Suburb – Bondi Junction, Sydney

Property Type – 2 bed Unit

Attributes – Bought with the view of capital growth. It is very difficult to secure a 2 bedroom unit in this area for less than $600k. The property, which is in a complex of only 12 units, also has off street parking and is tenanted for $500pw.

Settlement Date – 23/07/2010

Client – Local – 2141

Purchase type – Investment

Purchase price – $500,000

Transaction type – Ballot land release

Suburb – Gungahlin, ACT

Property Type – Vacant residential land

Attributes – This block was purchased for $450k 12 months ago. There is a shortage of land in the location and these clients have enjoyed a nice gain over the past year.

Settlement Date – 30/07/2010

Client – Local – 2240

Purchase type – Investment

Purchase price – $370,000

Transaction type – Private sale

Suburb – Mt Gravatt, QLD

Property Type – 3 bed townhouse in a complex of 20

Attributes – Good location with off street parking. The recent softer market made for good buying, with the added bonus of a motivated vendor and a great managing agent. The client is returning to the property market after a few years’ hiatus to add to their family.

Settlement Date – 25/08/2010

Client – Interstate – QLD – 2287

Purchase type – Investment

Purchase price – $375,000

Transaction type – On market – private treaty

Suburb – Cannonvale, QLD

Property Type – Vacant block of land

Attributes – Expansive ocean views. This property was purchased in a SMSF structure.

Settlement Date – 27/08/2010

Client –International – USA – 2246

Purchase type – Investment

Purchase price – $582,000

Transaction type – On market, Auction

Suburb – Macquarie, Canberra

Property Type – 5 bedroom house with ensuite & double lock up garage

Attributes – The property is located in close proximity to Belconnen Mall (Westfield) and will rent for $440pw. It was purchased by telephone from OS and the owners intend to reside here once they return to Australia.

Property investors and home owners were given a much needed reprieve this month as the Reserve Bank decided to leave the official cash rate of 4.5% unchanged for the third consecutive month, at its August 3rd meeting.

The RBA’s decision came as the June quarter Consumer Price Index (CPI) rate of inflation was a lower than expected 3.1%, just outside the central bank’s target band of 2 to 3%.

In a statement regarding the decision, RBA governor Glenn Stevens said, "With (economic) growth likely to be close to trend, inflation close to target and the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate."

While there are now signs of a slow recovery for most of the major world economies, uncertainty surrounding jobs growth and a deceleration in the housing market has seen Australia’s economy soften in recent months.

Australia’s seasonally adjusted unemployment rate increased to 5.3% in July, which CommSec economist Craig James said was not surprising given a slump in retail spending and more caution from the manufacturing and services sectors. 

He said, "The good news from today’s figures, in terms of interest rates, is that interest rates are clearly on hold until at least the end of the year, with most economists talking about 2011 as the next move."

Now is not the time for borrowers to become complacent with regard to the status quo of interest rates though. With most economists predicting that the RBA will take a wait and see approach until the beginning of next year, it’s a good time for those with a home or investment loan to consider restructuring their debt and hedging their bets against the next inevitable set of rate rises, by fixing a portion of their borrowings. 

For the first time in a while, 3 year fixed rates are closely aligned with the discounted variable rates on offer by most lenders. This represents great value considering the economy is likely to strengthen in the near future, causing a rise in inflation and the RBA to hike up interest rates accordingly.

Some estimates suggest that the official rate could peak at 5.5% by the end of 2011. But more concerning is the impending move by banks to increase their retail rates, regardless of what the RBA does, due to higher funding costs.

With these factors in mind, many in the brokerage industry are currently advising clients contrary to our general belief that you will always come out on top if you stick with a variable mortgage. On occasion we see a window of opportunity to fix some debt and actually benefit from such a move – and now is one of those times.

Many borrowers can fix with their current lender without having to change banks, therefore saving on refinance fees; particularly if they are willing to do a bit of negotiating by asking their lender to match, or get close to, some of the more attractive fixed rates on offer.

Some of the more appealing fixed rates right now include the Heritage Building Society (6.95%) and ING (7.09%). If you want to stick with one of the four majors, Westpac comes out on top with 7.19% fixed for 3 years, followed by the CBA and NAB at 7.29% and the ANZ at 7.35%.

These are all quite tempting options, given the current discounted variable rates range between 6.70 and 6.81% and in many instances, the difference between variable and fixed within individual lending institutions is only around 0.5%.

For borrowers who appreciate the security a fixed term brings, or fear the uncertainty of what lies ahead for interest rates; this is an alternative well worth considering.