The Reserve Bank is finally cutting interest rates again, and fast. The cash rate in Australia has not been this low since 2003 and has dropped 2 per cent in three consecutive meetings. But how low can they go? All signs point to another large cut of anywhere up to one full per cent when the RBA meets again in December which could bring the cash rate down to the lows of December 2001 when it sat at 4.25%. Borrowing this cheap was major fuel fror the ”Great Boom” of 02/03. Although we would all like the banks to pass on more of the cuts to borrowers, this could still see home loan interest rates sitting in the low 6 per cent range.
So variable or fixed? There are many pros and cons with both and it also depends largely on what type of investor you are. The more aggressive, fast portfolio builder generaly will go variable whereas the more conservative or risk adverse investor will lean towards fixed interest. What most people don’t know is that there are certain features of variable loans that benefit real estate investors, namely flexibility. Low interest rates are great, but having fixed low and then needing to refinance with heavy break fees will cancel out that benefit. Often investors will outgrow the bank they are with and need to refinance in order to continue building their portfolios and this is where most fixed products are designed to hold you to that lender or incur a penalty. Having said that many people would prefer the comfort of knowing exactly what their loan repayments are for the next few years.
If you are still going to fix you may want to consider waiting at least until December or you could miss out on another reduction of around 0.5 per cent on your repayments which is a saving of $1,500 per year on a $300,000 loan. Do not hold off property purchases however, for the hope of more rates cuts as many did in 2002. They missed the boat because of “well meaning advice” from ill informed friends, family and financial advisers.
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