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Let’s talk about home loan interest rates – What are they doing?

home loan interest ratesThere’s been a lot of media commentary lately around the movement of interest rates.

Are they going up?  When are they likely to go up? How much will they go up by?

Whilst it’s difficult to accurately predict exactly what rates are going to do, there are a few tools we use to help us determine the likelihood of certain rate scenarios playing out. We want to share them with you here.

Cash Rate Futures Yield Curve

To get an idea of what’s happening with interest rates, we like to keep an eye on the Cash Rate Futures market. By analyzing the implied yield figures at specific dates in the future, we can determine what the market expects interest rates to do in the short-medium term.

Here’s the Cash Rate Futures Yield Curve at market close on 23 February 2018. It shows that the market believes a rate rise is more likely to occur next year, rather than later this year.  You can find the ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve here.

home loan interest rates

Comparing the Standard Variable Rate, 3YR Fixed Rate and RBA Cash Rate

Another exercise that has been useful in the past is to chart historical movement of the Standard Variable Rate (SVR) vs 3Yr Fixed Rate vs RBA Cash Rate, as shown below. You can obtain the RBA data sets used to create this chart here.

home loan interest rates

We can see from the above chart that movement of the 3Yr Fixed rate historically has preceded a corresponding movement of the SVR.

For example, instances where the 3yr Fixed Rate has risen above the SVR, the SVR has followed – with a lag time. In these instances, you may have done well with a fixed rate.

Conversely, on occasions where the 3yr Fixed Rate changed direction and moved below the SVR, the SVR has then followed  – again, with a lag time. In these instances, you may have done better by staying with a variable rate loan.

However, since we’ve not had any recent overlapping of the 3Yr Fixed Rate and SVR plot lines, it’s hard to use the historical patterns we’ve just mentioned to predict future rate movements right now. We also need to point out that using historical data to predict future trends has its own limitations, but it’s a tool we’ve used in the past.

So, what does this mean for you and your loan?

The above analysis suggests that an increase to the SVR rate is unlikely over the short term. However, and here’s the bit you may not have expected us to say… that doesn’t mean a fixed rate loan is not worth considering.

But wait… Isn’t the whole point of locking into a fixed rate loan so you can secure a “good rate” before standard variable rates rise and save interest over the fixed rate loan term?

The correct answer is, ‘Yes’ and ‘No’.

Whilst in an ideal world, it would be great if you lock into a fixed rate loan at exactly the right time to save interest. However, you won’t know if you’ve actually saved any interest until the fixed rate term is over because it all depends on what the variable rate does over the same period. And considering the experts with all the financial analysis tools in the world don’t always get it right, predicting the exact “best” time to lock into a fixed rate loan can be extremely difficult.

There are situations when a fixed rate loan is a good idea (you can find them here). Likewise, there are other situations better suited to a variable rate loan (we mention them here).

The decision to take out a fixed rate loan needs to be considered as part of your broader borrowing strategy – and includes consideration thinking about whether you’re planning on consolidating or growing your portfolio.

You can always decide to opt for the best of both worlds and select a combination of fixed rate loans and variable rate loans. A split loan structure allows you to have certainty around your fixed rate loan repayments for budgeting purposes, whilst still taking advantage of the opportunities to save on your variable rate loan (for example – by using an offset account or making additional repayments into the loan).

With some good fixed rates on offer at the moment, now is the perfect time to revisit your fixed rate vs variable rate loan decision.




This post was published 27 February, 2018. This information here is provided for general purposes only and does not constitute financial advice. Before any specific lending or loan structure is recommended to you personally, a thorough Preliminary Assessment would need to be conducted to ensure any credit advice provided by MO’R Mortgage Options is not unsuitable for your specific financial situation.
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