Rates Swing to the 60's!

INTEREST rates are tipped to hit a record-low by winter - and analysts say this makes fixed-rate home loans a good idea again.

The popularity of fixed-rate loans collapsed to a record-low last year as the Reserve Bank of Australia slashed rates aggressively. This left some families paying interest rates of more than nine per cent while others on variable rates saw their mortgages drop. But fixed mortgages are now seen as possible insurance against a surprise rise in rates.

The fifth interest rate reduction in six months came after the Rudd Government unveiled its second stimulus package worth $42 billion aimed at reversing rapidly deteriorating economic conditions. The Government also halved its growth forecast for fiscal 2009 to 1 per cent and estimated the economy would slow even further in fiscal 2010 to 0.75 per cent. A budget deficit of $22.5 billion is now forecast for this financial year.

The easing in monetary policy by the RBA today takes the official cash rate to 3.25 per cent, the lowest level since 1964 when the federal Government controlled monetary policy, and comes on top of the 300 basis points in cuts since last September.

The rate cut was in line with expectations in financial markets. Some economists are tipping rates to fall to an unprecedented 2 per cent by the middle of the year as the worsening global economic crisis drags Australia into its first recession since 1991.

Westpac expects Australian growth in calendar 2009 to contract by 0.7 per cent and is tipping the official cash rate to reach 2 per cent by the June quarter. JP Morgan has further downgraded its growth forecasts to minus 0.5 per cent, down from a previous forecast of minus 0.2 per cent. The IMF expects Australian growth to contract by 0.2 per cent this calendar year before growing by 1.75 per cent in 2010.

With interest rates on home loans now also at four-decade lows, experts believe that fixed-rate borrowing was starting to look like a good option again. Debt futures markets see interest rates falling to three per cent by March, which would be the lowest cash rate since early 1960.
With fixed-rate loans now holding a record-low share of the mortgage market, lenders are offering cheaper mortgage rates to entice borrowers away from the lowest standard variable mortgage rates since the 1960s. The fixed-rate mortgage would be attractive if rates rose again in the next three years, and drove up standard variable rates.

Just 2.5 per cent of new borrowers chose a fixed-rate home loan, set for two years or longer, in November, Australian Bureau of Statistics data shows.

Months earlier, between March and August, more than 43,000 unlucky borrowers locked themselves into fixed rate home loans, charging more than nine per cent interest, because they thought rates would keep rising as inflation soared.

The latest rate cut took the cash rate to a 45-year low of 3.25 per cent, and standard variable home loan rates below six per cent for the first time since the 1960s.