Where will the average standard variable interest rate be by the end of May 2009? And should borrowers consider fixing or stay variable?
"The RBA will continue to cut rates but in smaller increments. The banks will not, however, pass on full reductions despite political pressures as funding costs and defaults will rise. The yield curve is still flatter than normal which indicates uncertainty. It's not easy to pick the bottom but current fixed rates are low by historic standards. So, if you want certainty, consider a long-dated fix now. If you want the best rate and you want to bear some risk, stay in variable for the next few months but watch for signs of fixed rates moving up and fix then"
Martin North, managing consulting director,
"Given the likelihood of further rate drops below current lows, I continue to choose variable rate loans. What will change my opinion is when I see the odd lender increase fixed rates, then another, signalling the cost of funds may have hit the bottom of this cycle. At that point, product switch quickly from variable to fixed. Lenders may come out with a hot 'Special 2 or 3 Year Fixed Rate' - if really low (ie, 4%pa), then take advantage of that very low rate and fix. As always, reassess your financial plans for that term; if in doubt, speak with your mortgage advisor"
Martin Castilla, personal mortgage advisor, Smartline
"It may be prudent to stay variable until early in the new 2009/10 financial year, and watch the movement in rates. I would consider fixing a part, or even the entire loan in July/August 2009"
Iain Forbes, director, AFM
"When deciding whether to fix your interest rate or not, it's important to factor into your decision three things; firstly, what economists are predicting about interest
rates; secondly, the 'comparison rate' of the variable and fixed rates (the comparison rate includes the cost of total fees excluding exit fees); and, thirdly, how the fixed rate compares to the variable rate for different fixed terms.
If the mid-term fixed rate (three years or less) is less than the standard variable rate - which it is for many financial institutions at the moment - then this indicates that the financial institution has priced into the fixed rate an expectation that the variable rate will fall.
Taking the above three factors into account, it appears that with, an expectation that variable rates will fall again in the short term, there's no need to lock rates in at the moment. However, as we've all learned lately, things can change very rapidly and there's no substitute for staying vigilant on rates and doing your homework.
Fixed rates, your personal circumstances and economic factors need to be monitored closely over the coming months. Fixed rates are historically low again and may drop even further. However, it's important to remember that you won't be able to time a shift to a fixed rate loan perfectly. It's also important to remember that if you lock into a fixed rate and you have to break the loan, you may have to pay considerable exit fees. If you think your circumstances will change in the coming months that will require selling your home or investment property, don't lock in the rate"
John Maher, FAPI CPV, Property Strategies Australia
"With the RBA's cash rate approaching the trough for this easing cycle and with fixed rates generally well below current variable rates, it's wise to start thinking about fixing a portion of mortgages (say 20%) and to then gradually increase the fixed portion over the next six to nine months in order to ensure that low rates are locked in"
Shane Oliver, head of investment strategy and chief economist, AMP Capital Investors
Given inflation could become a problem in 18 months, a three- or five-year fixed rate is worth considering soon"
Andrew Hunter, general manager, Peach Financial Group
"interest rates are still in a downward cycle, so it would be prudent to wait until we realise some stability in standard variable rates prior to fixing your loan. Enquiries for fixed rates are increasing as rates reach 30-year lows, with consumers looking to avoid the next high rate cycle. If you're considering fixing your loan, ensure that you're comfortable with all the conditions associated with the new contract, and remember with fixed rates either the customer or the lender will lose! Consider a split loan option to give you the best of both worlds if fixing is important to you: this will give you the certainty of a fixed rate and the flexibility of the variable"
Lisa Montgomery, head of marketing and consumer advocacy, Resi
"I've consistently underestimated the decline in mortgage rates because every time it has looked like the RBA would be able to reduce the magnitude of a particular rate cut, the speed of deterioration in global economic conditions means they've been unable to do so. Mortgage rates are now highly stimulatory, provided of course you can meet tighter lending conditions. A further 75 basis point reduction to 5.32% is expected, which would mean many variable mortgage rate holders would actually be looking at a rate with a four in front of it. Stick with variable for now. If peace of mind over the next few years is important, there's still time left to make that decision to fix"
Harley Dale, chief economist, HIA
"Along with many economists, I firmly believe interest rates still have some way to fall; therefore, at this point in time I wouldn't be recommending locking into a fixed rate product"
Darryl Simms, managing director, Access Loans P/L
"Shopping around now, particularly as more special offers begin to hit the marketplace, could be a smart move depending on your circumstances. For anyone requiring a level of repayment certainty, some specials may prove quite attractive but make sure you check out the fine print and that you understand the obligations and the limitations of the loan you are considering. As fixed rates don't always offer the same flexibility as a variable rate loan, a part-fixed, part-variable option could certainly allow you to hedge your bets and have the option of reducing your loan substantially via your variable rate facility while enjoying some stability. Knowing your own requirements is really the key to whether or not you should fix your loan"
John Kolenda, executive producer, Loan Market Group
"I foresee a 0.5% cut in rates at the next meeting, and then perhaps one more this year before the Reserve Bank plays a wait and see game to measure the results. I've never seen a time when it's been better to fix rates. At the present time, a fixed rate is lower than the variable, which is a sure sign that bank economists expect the variable to be quickly lowered again. Fixed rates aren't offered because banks want to be nice to us - it's because they believe they can win on the deal.
Australia is full of those who panicked some eight months ago and fixed their rates and are now sorry. You should only ever fix your rate in an increasing rate environment"
Margaret Lomas, founder, Destiny Financial Solution
"We should keep in mind that fixed rates are historically quite low at the moment. If your cash flow is tight but affordable at fixed rates, this could make a fixed option more attractive. It should be noted that with the 1% rate reduction which happened in February, fixed rates with most lenders still sit at the same or similar level prior to the RBA announcement (at time of writing). This highlights that the banks are managing their risk in regards to the fixed rate offerings they provide to consumers. We needto do the same thing when considering the pro and cons of fixing ourselves"
David Johnston, director, Property Planning Australia
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