The issue confronting a lot of Australians right now is whether or not to fix interest rates on their housing loans. The banks have already raised their fixed interest rates potentially in an effort to entice home owners to lock in a rate now before they rise again. So should Australians be looking at locking in a fixed rate? To answer this, let’s look at where interest rates are heading over the coming years.
Given that economies run in cycles, if we review the historical movements in the RBA rate rather than economic forecasts, we can ascertain that the official RBA interest rate is unlikely to move above 5 percent before 2013, with it more likely to fluctuate between 3 and 5 percent. Given that banks generally fix their rates at between 2 and 3 percent above the official RBA I don’t believe it would be worthwhile in the short to medium term for home owners to lock in their rate unless they are seeking ways to better manage their cash flow.
From a cost perspective, I think variable rates are the way to go given the savings that home owners will receive with the lower variable rates available, the flexibility they offer and the low probability of rates rising significantly in the foreseeable future.