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.
