Vision Archives

Thinking of fixing the rate on your loan?

Many of our clients are asking us ‘When are rates going to start rising again?’ or “When should we fix our loans?” We don’t have a crystal ball, but here are some thoughts:

Fixed v Variable - whether you choose variable or fixed rate loans, it is a bit like having a bet

Variable rate customers – are generally OK with riding the wave of the economic uncertainty. When the economy heats up, they will experience the pain of variable rate increases. But when it cools down, they enjoy a drop in the rates on their loans.
Fixed rate customers - wish to have certainty over their level of repayments. The risk taken here is that the economy significantly cools, rates head down and borrowers are stuck in a higher rate. Unfortunately many of us with fixed rate loans are in this dilemma at the moment.

Where are interest rates heading? A lot of you will know that there is significant volatility in the financial system. It is difficult to say with certainty:

When will it all get better?
How low will rates go?
When will they start the long slow rise of a new cycle?

Anyone telling you the answers to these questions is guessing. Some guesses may be based on wider information sources, but they are still estimates.

The issue with perfect timing? Picking interest rate movements is difficult.

Rates could continue to drop over the next 2 years
Rates could rise and then drop
Rates could remain relatively unchanged for a year or so

It is simply too hard to pick the time immediately before or after a long term fall or drop. It is also too hard to pick how long rates will stay at certain levels.

How do I decide if the time is right to fix? We recommend that you try not to get caught up with perfect timing. It is simply too hard to achieve perfect timing and it mainly requires a fair amount of luck. What you need to be comfortable with is:

Whether you want to fix at all
Whether you are comfortable with the fixed rate on offer at the time of your consideration

Vision can certainly assist you with your assessments to these questions.

Where Vision can assist

Provide information - we will continue to provide information about what we hear is happening within our industry
Answer your questions – if you have any questions relating to your particular situation, then please call us
Assist roll out changes – if you do decide to fix, we will take you through the relevant steps involved

Why lenders are moving rates

The last 6-12 months has seen lenders move their standard variable home loan lending rates independently to the RBA movements. The RBA drops 0.25%, some lenders move only 0.10%. The RBA doesn't move rates and some lenders still see fit to increase their rates.

Banks operating in Australia raise money to lend out in a combination of 3 main ways

Bank deposits – 40%-45% of money raised comes from bank deposits - this is money put in the bank by households, organisations (corporate, co-ops, not for profit companies) and governments
Equity – this is money raised through the issue of shares to investors and money generated through earning profits
Borrowings in Capital Markets - Just under half of banks’ funding comes from capital markets, with a little more funding raised offshore than domestically. About three-quarters of domestic capital market funding is short term, whereas most offshore capital market funding is long term. A further 4 per cent of banks’ funding comes from securitisation; the vast bulk of assets that are securitised are housing loans.

It is this 3rd source – borrowing in capital markets – that has been most dramatically impacted in the last 12 months. Basically, the cost of borrowing on capital markets (especially foreign markets) has risen significantly.

This means that there has been a significant increase in the cost of funds being raised by lenders. It has been this increase that has led to lenders moving their borrowing rates independently to movements in the RBA cash rates.

To read some more articles – see

RBA June 2009 Bulletin

Various others