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  • Writer's pictureCOMPASS

Fixed v Variable Home Loan Interest Rates

As you may or may not be aware because of the potential negative impact of Covid on the Australian economy through 2020 the Government via the Reserve Bank of Australia had been taking steps to make sure that there was plenty of cash circulating to keep the economy stimulated.

A way for the Government to intervene in what is referred to as ‘market operations’ is to buy and sell government securities. The securities ‘Treasury Notes & Bonds’, offer a strong form of security for investors where they feel their investment is protected and will still offer a reasonable return. The Reserve Bank can purchase back these securities at any time and the cash used to buy them is therefore injected into the economy.

Now they do this in order to stabilise interest rates (yields) where they perceive that’s necessary. It can be short term or long term rates that they target. In the statement from the Governor of the Reserve Bank in November 2020 he outlined the bank was looking to purchase back some medium to longer term ‘bonds’ .

A reference to that can be found under this link, setting out the timing and amounts and what actions they would be taking from February 2021.

Now the importance of the above is that the effect of the Reserve Bank’s action has meant that commercial banks were recently able to purchase relatively cheap 3, 4) & (5) year fixed rate money in the money markets and have subsequently been able to pass these low rates (under 2%) on to borrowers.

However once those borrowings are taken up there is no guarantee that more so called ‘cheap’ fixed rates like this will still be on offer , unless the Government via the Reserve Bank steps in again . There is some discussion that post 30/6/21 we may see a rise in those fixed borrowing rates then on offer. They are presently sitting around 50 basis points (half of 1%) below the basic variable rate . It may very well be worthwhile opting for a fixed rate if you are looking to protect part of your home loan borrowing at this point.

You can contact Michael on 65832211.

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