Interest Rates – When is the Right Time to Fix?

One of the hottest topics for property investors, and Australians in general, is interest rates.  If only I had a dollar for every time I’ve been asked ‘When is the right time to fix?  How do we know when the rates have bottomed out?  What if we fix our interest but the rates keep falling and we miss out?’

To illustrate how falling interest rates deeply impact home owners, consider this:

If you purchased a property 4 years ago, your standard variable rate would have been around 9%.  Fast forward to today and the standard variable rate is 6.4%, with real interest rates around 5.9%.

On an average $400,000 mortgage, that’s a whopping saving of over $1,200 per month, before depreciation and tax are taken into consideration.   This potentially pushes negatively geared properties into cashflow territory, perhaps reversing the position of entire portfolios and creating income where none existed previously.

Despite the importance of interest rate levels to the performance of a property, few investors have a good grasp as to the factors that influence interest rates or how to assess the right time to fix their loan.

For those of us who have watched interest rates over the long term, we are delighted to see them plunge to current record lows and media hype abounds as to whether they will continue to fall.  Certainly investors everywhere should take stock of their specific situation, consider their options and be prepared to take action.

aus crash rate

Currently, the Reserve Bank of Australia (RBA) has the official cash rate set at a record low of 3.00%, which was reached in December 2012. It briefly reached that same level in 2009 during the darkest hours of the Global Financial Crisis. Banks are currently offering variable rates in the range of 5.80% to 6.00%. Given that these are historically low rates, investors should find very good deals now…. but is this the right time to fix, or are deals about to get even better?


Many experts, including head economists at our major banks believe the answer to the latter question is ‘Yes’.

To begin with, consider that the futures market is currently factoring a 100% chance of a further 0.25% cut by May 2013.  Chief Economist at Westpac, Bill Evans, has both an excellent track record in predicting RBA rate movements and a wonderful way of explaining why his team reaches its conclusions.  Evans stated on 1 February 2013 that he believes the next rate cut will occur in March.   “Our current forecast is that the steady rate approach will hold throughout 2013 after the March move. Markets are expecting a total of two more cuts, with the low point in rates around mid 2013.”

So what does this mean for investors? Well if Evans and his cronies are right, interest rates will fall further – by 0.25% between March and May with at least one more fall to occur during this cycle which will reach its low point sometime late NEXT year.   So if we fix our rates now do we risk missing the predicted low point in the cycle?

If you’re highly informed or if you’re a gambler then you may want to watch and wait but bear this in mind: As investors, it is our job to understand how general global conditions might affect Australia’s housing markets but it is not our job to pick the bottom of the cycle.

Investors, whether starting out, building their empire or retiring to enjoy the fruits of their labour should seek great deals that support their specific strategies and which give them certainty for as long as possible.  Only you know whether it suits your portfolio and your risk profile to fix now and gain certainty over exactly how much you’ll pay on those mortgages OR to enjoy the current low variable rates, continue to monitor the situation closely, and be ready to pounce when the data says so.

Whichever way you go, there has never been a better time to invest in real estate, and start building the life of your dreams.

Until next time, happy investing


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