The Rate that Stops a Nation

The Rate that Stops a Nation

 

There’s a highly anticipated event coming on Tuesday, an event that’s likely to have far reaching effects on hip-pockets across Australia. The punters will be placing their bets, small fortunes may be won and lost, and afterwards there’ll be winners, losers and quite a few onlookers wondering what just happened.

By pure coincidence, there also happens to be a horse race on the same day, but the big news is that the Reserve Bank meets on the 4th of November to decide on what to do with the official cash rate. If the RBA’s press release following its October meeting is anything to go by, ‘no change’ should be the bookies favourite. But there are some indicators that favour a rate rise getting up, if not this month then possibly later in the financial year.

Minutes from the RBA’s October meeting noted the continued and likely future strength in dwelling investment, and the RBA is sure to keep an eye this, given the recent strong house price growth in Sydney and Melbourne.  Most other indicators point to moderate growth in the near-term, and recent issues with ABS labour force data has clouded the view on employment growth.

Given the RBA’s stated intention to maintain the existing ‘accommodative’ rates and the possibility of a future rate rise, it may come as a surprise that some banks have set their fixed interest rates lower than their variable rate. For example, one of the major banks currently has a 2 year fixed interest rate of 4.59% and variable rate of 4.94% on one of its loan packages.

On a loan of $450,000, fixing at the 4.59% represents an annual saving of $1,087. If the Reserve Bank was to increase the cash rate by 0.25% at some point in the future, and the bank passed on the full rise, a further saving of $790 can be made by fixing. That’s a difference of nearly $2,000 a year.

Lee Hallums is a finance broker at KLI Mortgage & Finance with 15 years experience in the banking and finance industries. “What we are seeing at KLI Mortgage and Finance is roughly 60% of clients fixing at least a portion of their home loan, whether they’re new applicants entering the property market or existing clients re-structuring their facilities.”

Historically, it is unusual for fixed rates to come in lower than variable rates. This is generally because a fixed rate offers certainty to borrowers, who pay a premium to ensure that their interest repayments won’t fluctuate in the future. This might be an option for punters who prefer to gamble on racing and not on their future interest rate.