Interest rates have been a hot topic lately, with much speculation about where they’re headed in the coming months. Even before the RBA’s decision to hold the cash rate steady at 4.35% in September, many lenders had already begun offering lower fixed rates, which may appear tempting to borrowers. But how exactly do these fixed rates work, and what do they reveal about lenders’ expectations for future rate changes?

Lenders Are Offering Slightly Lower Fixed Rates—But Should You Lock In?

Recently, some lenders have been offering fixed rates that are only marginally lower than their current variable rates. For instance, a 2- or 3-year fixed rate of 5.59% might seem like a good deal at first glance, but it’s only about 0.55% lower than the variable rate being offered by the same lender.

This raises the question: What do lenders expect to happen with interest rates in the near future? It’s possible they aren’t predicting more than two rate cuts over the next few years. If they were expecting significant rate reductions, we might see lower fixed rates to stay competitive. Alternatively, lenders could be banking on borrowers’ desire for relief and certainty, prompting some to lock in these slightly lower fixed rates prematurely, seeking stability amidst uncertainty.

What Could Happen if Rates Fall?

There’s also the possibility that interest rates could drop 4 or even 5 times over the next 12 to 18 months, as some market analysts are predicting. If that happens, borrowers who lock in at 5.59% today could find themselves stuck at a higher rate, while variable rates possibly drops to around 4.89-5.10%  over the next 12-18mths.

This scenario could lead to frustration for those who jumped into what seemed like a small saving at the time, only to watch the variable rate decline further. A fixed rate might offer certainty, but it could also limit your ability to take advantage of future rate cuts.

Balancing Fixed and Variable Rates: Is a Split Loan Right for You?

For those torn between the certainty of a fixed rate and the flexibility of a variable rate, there’s a middle ground: a split loan. This allows you to fix part of your loan while leaving the rest on a variable rate. A split loan can provide the stability of knowing part of your repayment won’t change while also giving you the flexibility to benefit from potential future rate reductions on the variable portion.

This approach offers a balanced solution, providing limited exposure to market fluctuations while maintaining some certainty.

What Should You Do?

Deciding whether to fix your interest rate or keep it variable can be tricky, especially with so much uncertainty in the market. That’s why it’s essential to seek professional advice before making a decision. While fixed rates can offer stability, locking in prematurely could cost you more in the long run if rates drop significantly in the near future.

A broker can help you compare different options from various lenders and tailor a solution that suits your specific circumstances and financial goals. Don’t rush into a decision based solely on today’s rates—make sure you understand the bigger picture.

 

If you’d like to explore your options and ensure you’re making the best choice for your situation, get in touch with us today.