Have we seen the bottom for interest rates? Brendon thinks not!

I hope you have had your figurative seat belt on this year (as well as, of course, your literal one—safety comes first!). It has been a rollercoaster of world-impacting, once-in-a-generation, unprecedented events.

Think back to a year ago, none of us would have picked that interest rates would be closing in on 2% by the end of the year. In last Christmas’s Velocity interest rate sweepstake, my money was on 3.5% … hmmm.

But amidst all the uncertainty, here is what we know in terms of interest rates …

In September, the Reserve Bank kept the Official Cash Rate at 0.25, with a signal it may drop early next year. The Reserve Bank did indicate they were going to fund banks in a way that would allow mortgage interest rates to drop. I don’t think it’s possible to get a clearer message that we aren’t at the bottom of the interest rate cycle yet.

So, what to do? Fix or float? And for how long?

Right now, a good 1-year rate is somewhere between 2.49% and 2.55%. The longer you fix for the higher the rate (but not by much to be fair). A floating rate is around 4%. An unfortunate fact is that a 6-month fixed rate is priced pretty close to the floating rate at most banks (more on that soon, but it seems it just isn’t a duration the banks are interested in competing in).

Here is what I think:

It doesn’t look like rates are going up in the next year (the experts are predicting this—I am just the messenger). Fixing for longer than a year would seem like extra cost for something that is unlikely to occur, but if you value certainty, then you may still choose to fix for longer than a year.

If the 6-month fixed rate was the same as the 1-year rate, I would tend towards fixing for six months. However, because it is not competitive, it is really a choice between keeping your loans floating for a few months or fixing for one year now.  In most cases, fixing for a year seems to make sense, even if rates drop in the next few months.

However you do it (keep your payments the same, use revolving credit or offset accounts), please, please, please, use these low rates as a chance to pay down debt. Do talk to your adviser about the best strategy for you.

Brendon Ojala is a Registered Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.