I have for at least the last two months, been expecting some downward change in what lenders will be offering on their one to five years fixed rate home loans. Now the reason why I am watching this closely now, is because these changes in where the rates sit, offer an insight into where economists and bankers believe interest rates and more importantly the economy, are heading in the short to medium term. It’s reflective of economic volatility or certainty/uncertainty as the case may be. The industry plots these changes, referring to them as ‘interest rate yield curves’. Here are the three basic types of yield curves:-
Positive – where interest rates are lower at the short term end, say one year, steadily rising out to five years at the longer end.
Flat – where interest rates are pretty much the same across the board for one to five years.
Inverse – where interest rates could be higher in the shorter one to two year terms but lower in say four to five years.
So think of it like this, if an economy is seen to be contracting over the next few years, as in slowing growth, it tends to be reflected in an inverse or flat yield curve. There is less demand for money where the economy is not growing so the ‘price’ of money declines. No different to any good or service. Of course we are not adding any other variables just to illustrate the main point.
As an example of a ‘flat’ yield curve, on the 30/03/23 ING dropped all their fixed home loan rates to reflect the following under one of their stronger ‘Orange Advantage’ package loan options:-
Term Rate
1 year 5.44%
2 years 5.44%
3 years 5.34%
4 years 5.34%
5 years 5.44%
Basic variable rates are at best sitting just under 5% at present but most lenders are closer to, or just below, the above rates. It may be that as the economy slows further we will see further reduction in fixed rates. For people that might be struggling with higher loan repayments on variable rates, the option to fix at a lower rate may be beneficial from a cash flow perspective? Of course each individual’s circumstances are different and are treated accordingly after proper analysis. Suffice to say reviewing your home loan options is always essential and this just adds another element to that discussion.
If you have any questions give Michael a call on 02 6583 2211.
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