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Should I lock in a fixed rate on my home loan with interest rates so low?
Finance & Fury Podcast
English - July 18, 2018 01:17 - 15 minutes - 14.3 MB - ★★★★ - 4 ratingsInvesting Business Education wealthhappinessfinance Homepage Download Apple Podcasts Google Podcasts Overcast Castro Pocket Casts RSS feed
Welcome to Say What Wednesdays – Where we answer your questions about personal finance and the economy!
This week’s question comes from Michael. His question related to interest rates, and to not give away his details I’ll paraphrase: “With interest rates at the moment being currently fairly low on my personal home, do you think it is a good time to lock in a fixed rate, or should I keep it variable?
I can’t give a yes or no answer on this one without knowing more about your personal situation, but can speak generally.
To answer this, we will run through three players in the game;
RBA Cash rate Interest rates of the banks Deposit rates of the banksAll three of these are related
RBA cash rate is the core, which then leads on to what banks lend out at, and then also what they offer on deposits placed with the bank.
RBA Cash rate – what the RBA set as monetary policy through OMO and the supply of money
We have been talking about this in recent Furious Friday episodes.
Bank interest rates
These are related to the RBA cash rate, but can move out of ‘cycle’ The do follow one another, but the banking deposit rates are what the cost is for lending The two go hand in hand - Banks use deposits to lend (went through this in last Friday’s episode)Big Four Deposit rates
ANZ Deposits: 12m - 2.3%, 24m - 2.6%, 36m - 2.5% Lending: 36m 4.14% CBA Deposits: 12m - 2.2%, 24m - 2.6%, 36m - 2.4% Lending: 24m – 4.04% NAB Deposits: 12m - 2.4%, 24m - 2.6%, 36m - 2.7% Lending: 1 year - 3.89%, 36m - 3.94%, 5 years - 4.09% WBC Deposits: 12m - 2.3%, 24m - 2.4%, 36m - 2.5%Investment and interest only rates – March banks dropped these by 0.3% to 0.5% on average.
What this means:
Anticipation for rates going up isn’t high If lending rates were high in 3-5 years, the anticipation from the banks would be that rates are going back up The bank isn’t going to lose out on money hereRBA Rate indicator – this keeps sliding further and further into the future
Has been for the past 12 months: Shows steady for 12 months, then slight change of increase All the way through to end of 2019 – 50/50 chance of raise to 1.75%The signs:
GDP – better growth but still below long-term trend Retail sales – May be going backwardsBut…this isn’t the whole story:
Interbank credit spreads are a powerful leading indicator of where mortgage rates are heading. Spread: Difference between banks offer of their borrowing vs lending out money Interbank spreads are getting wider, so mortgages rates may go up. But competition between lenders is high, so this keeps them honest. Other option: They might to decrease the deposit ratesThe take away:
Getting back to the question of ‘locking in rate now’