Rates Down. What to Tell the Client?

Fixed rates are falling like dominoes.  What do you advise your clients to do?

It all started a few weeks ago when CBA came out with a 5-year fixed loan of 4.99 per cent.  That week, the other majors responded by matching the rate.

Then, the second tier lenders responded.  Some had to cut even further to compete against the majors.

In this Internet age, borrowers know about these record-low rates so they don’t need their broker to tell them of these great rates.  The opinion they are seeking from their advisors is whether they should lock in these fixed rates.

So what do you say?  Can rates go even lower?

Generally, over the lifetime of a loan, borrowers on variable home loans do better than borrowers on fixed rate loans.  But mathematically, it’s hard to imagine how variable rates could go much lower.

As the graph below shows, we do appear to be in an unprecedented period of rate stability.

To complicate matters, economists are divided as to which way the next interest rate move will be.  Most say that, eventually, rates will go up.  But some believe that there is still a further rate drop to come.

Perhaps this is the strongest argument for locking in a five year fixed rate – it provides the borrower with certainty as to what their repayments will be for quite a few months to come.

CBA, of all banks, chasing market share through low rates is pretty unprecedented.  What is not unprecedented is home owners enjoy peace-of-mind knowing they can predict the family budget.

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