Will Interest Rates Drop?

According to RateCity's extensive database of more than 100 lenders, the new average three-year fixed mortgage rate (which is the most commonly chosen fixed term by borrowers) is now 7.35 percent. That's a 3 basis point decrease since July 1, 2011 and only 5 basis points ahead of the average standard variable rate of 7.30 percent.

Some of the most recent lenders to have dropped their fixed rates include Citibank, which lowered its three-year fixed rate by 33 basis points effective yesterday to 6.99 percent. That's 79 basis points below the benchmark standard variable rate - the average of the four major banks.

ANZ also lowered its three-year fixed rate, by 5 basis points to 7.19 percent on July 16. NAB dropped its fixed rates by up to 15 basis points last week (July 11) such as its three-year fixed rate, which is now 7.24 percent.

Damian Smith, RateCity's CEO, said the gap between the average three-year fixed rate and standard variable rate hasn't been this tight for at least the past two years.

"Some fixed home loan rates have actually been falling for some time. Average three-year fixed rates dropped during 2010, and we've seen them fall by 8 basis points this year to a new low of 7.35 percent on average (see table below).

"Obviously, many variable rate customers are paying less than this average, and in fact, if a variable rate customer is paying 7.3 percent, then they should be talking to their lender about getting a better deal, For new borrowers, the gap hasn't been this small for some time," he said.

"On average over the interest rate cycle, the best strategy for most borrowers is to find the lowest variable rate and make the highest possible monthly repayments. But when fixed rates are this close to variable rates - which happens relatively rarely - there's good reasons to think about fixing.

"One option that "hedges your bets" on the direction of rates is to look at a split loan - for example, fixing 50 percent and having the other 50 percent variable," said Mr Smith.

Despite Westpac economists predicting the next movement in rates might be down, RateCity has cautioned borrowers to continue to pay down debt where possible.

"Most commentators are still sticking with the Reserve Bank's formal view - which is that rates are likely to rise over the next 12 months. Borrowers really shouldn't get too excited at this stage, and should be looking to reduce home loan debt with additional repayments where possible.
However it seems most Aussies don't agree. A Loan Market poll which asked "What do you think the RBA will do with interest rates for the remainder of 2011?" found 40 per cent of respondents said the cash rate would stay at the present level of 4.75 per cent.

So what do you think?

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