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Opinion: Are interest rates in a bit of a fix?
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Opinion: Are interest rates in a bit of a fix?

Kim Cannon 3 minute read

Industry observers predicted further interest rate cuts for 2015. But few anticipated oil prices would fall through the floor while the New Year was still new, writes Firstmac’s Kim Cannon

Like it or not, the petroleum industry is the engine room of the world economy. If you think of the old saying about a butterfly flapping its wings in Brazil setting off a tornado in Texas, oil prices flap like a condor in global markets.

The crude oil price drop hasn’t been fully felt at Australian bowsers because of the exchange rate, but still it had an effect on petrol prices.

Obviously, Australian households vary widely in their spending habits due to factors like income, number of people in the house, age of the family members, and geography.

Research shows weekly spending on petrol ranges from $26.17 per week to $107.90 per week. The average is $65.54 or 4.13 per cent of household expenditure.

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It’s a significant cost, so a drop of a few cents a litre at the pump adds up to real savings over the course of a few weeks. In Sydney in January, petrol dropped below $1 a litre for the first time in six years.

It leaves extra dollars in the household budget each week for spending on necessities that might otherwise get scrimped on, or little luxuries that usually don’t happen. At the very least, less pain at the pump gives consumers a boost in confidence about the balance of their income to expenditure.

There is a chance this could be enough to prompt the RBA to hold fire on further cuts to the cash rate, which would mean interest rates may well have gone as low as they are going to go.

Which begs the question, is now the time to fix interest rates?

There will always be a market segment of borrowers who will bank on a variable rate, just as there are those who prefer a fixed rate, no matter what, because their household budget is set and they don’t like surprises.

But how many brokers will gravitate towards recommending fixed-rate loans now that economic times may be changing?

After the race to the bottom that was 2014, variable interest rates were what most borrowers were chasing, with many a commentator heard to remark: “If your interest rate doesn’t start with a four…” – you know how the rest of it goes.

Now, the fixed-rate space is the one to watch as competition heats up for lower interest rates over one-, three-, and
five-year terms.

Lending industry leaders who have driven competition in variable rates are increasingly turning their attention to developing pointy-end fixed-rate products and getting them into the market to stake their claim on the fixed-rate space.

The logic is that early skin in that game will register with customers about the same time as it dawns on the market that variable rates have stopped dropping.

It’s a clever strategy because it gives lenders a bet each way and the customer wins. If the cash rate doesn’t drop any further and competition cools in the variable interest rate market, borrowers are more likely to fix their rates.

The lenders will be ready with a range of fixed-rate products established in the market and the best brokers will be on top of the latest offerings to showcase to their clients.

It seems 2015 is shaping up to be the Year of the Fix.

Opinion: Are interest rates in a bit of a fix?
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