Where are interest rates heading?

By Nila Sweeney

Interest rates are very hard to predict. Very few people can consistently forecast interest rates correctly. Borrowers trying to predict future home loan interest rates should consider that professionals who get paid large amounts of money quite often get it wrong.

Home loan interest rates are based on interest rates in the wholesale money and fixed interest securities markets. Current interest rates in these markets are based on participants’ expectations about future interest rates. Suggesting you can predict where interest rates are heading is like saying you either have more information about interest rates than the market traders or that you are better at analysing the information than they are.

Regardless of how difficult it is to predict interest rates, borrowers need to choose which type of home loan they want.

Variable home loan interest rates are still lower than fixed home loan rates. Variable rates would have to rise quite significantly and in a reasonably short period of time for a borrower to be better off with a fixed interest rate. This does not appear to be likely to happen, but how many borrowers with variable rates in the late 1980s would have expected their home loan interest rate to rise above 17%?

One point to keep in mind is that fixed rates are generally less flexible and the borrower may be penalised if they make extra repayments or try to pay out the loan in full during the fixed period.