Interest Rate Hike Sooner or Later

September 13th, 2013

“Since before the first round of rate cuts in November 2011, fixed rates have been consistently tracking at around 1 percentage point below standard variable rates,” said Parsons, adding “We know that most people are on discounted variable rates with the major banks, which are usually around 0.70 percentage points lower than advertised rates, meaning fixed and variable rates are almost on par – in other words the gap is closing.”

According to Parsons, the narrowing gap between fixed and variable rates is a solid indicator that borrowers should start preparing for a rise. ; “Interest rates are at record lows and for many young Australians the prospect of buying their first home is suddenly a reality." said Parsons, adding “borrowers should prepare for the eventuality of higher interest rates in the future... It’s really important that borrowers don’t overstretch the budget because this can only lead to tough times when rates eventually do increase."

In another sign that an interest rate rise could be on the horizon, the Australian Prudential Regulation Authority has recently mentioned a possible rate rise when warning about the dangers of low-deposit loans. ; According to its report, the number of low-deposit loans has been on the rise since 2010, with a big jump recorded during the June quarter this year. ; "It is important for [authorised deposit-taking institutions] to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current record low levels," said the report.

With interest rates sitting so low, it is inevitable that they will start to rise at some point in the future. ; While this can be dangerous for people making future budgets based on current figures, it may also provide an opportunity for some borrowers. ; According to Parsons, “We know fixed rates usually start rising well before variable rates, and borrowers often miss the lowest point. After all, the banks have a far better chance of predicting future rate movements than the average punter... Based on this logic, borrowers who are interested in fixing should keep a close eye on rates over the coming months and be ready to act on signs of fixed rate increases.”