The next day one of those risks reared its head when the Reserve Bank cut interest rates by 0.25%.
As I’d suggested, this was not unexpected; the 30-day interbank cash rate futures had been pricing in an October cut since early September.
Furthermore, the cash rate futures were heading towards another 0.25% cut this year and another 0.5% cut by mid 2013.
So now it’s time to look at the risks of taking a fixed rate on a home loan at the wrong time.
News out last week from Australian Finance Group (AFG) suggested the demand for three year fixed loans had hit a four year high in September.
Interestingly enough, the last time fixed loans hit such popularity with AFG was back in March 2008.
Now have a guess when the interest rates peaked that year?
If you guessed March, you’d be correct; that was the last time in 2008 the RBA lifted interest rates.
At the time, six consecutive interest rate rises had plumped the cash rate to a hefty 7.25%, leaving borrowers locking in at rates over 9% if borrowing with a major bank.
By December the cash rate had been cut to 4.25% and by April 2009 the cash rate had hit 3%.
Standard variable rate mortgages fell to around 5.75% with a major bank.
Those that locked in a year earlier still had 23 months to run on a fixed mortgage with a rate over 9%.
As you might imagine, an extra 3% on any six figure sum becomes a significant penalty to be paying each week.
However, those borrowers gambled that after six consecutive rate rises, rates could only go higher.
Now just as rates are trending downwards, borrowers are gambling that rates won’t go any lower.
It’s an interesting study.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL/ACL 224543, www.mfg.com.au This information is general in nature and readers should seek professional advice specific to their circumstances. Need help with your financial your financial future, we think we’re the best financial adviser in Australia.
