If you are thinking of fixing your mortgage, now could be the time: Xavier Perronnet

Earlier this month, the big four banks gave their predictions on the official cash rate’s likely movements over the next year. Although none of them predicted an increase, the figures were startlingly different. 

NAB: No change

Commonwealth: -0.25 percentage points

ANZ: -0.5 percentage points

Westpac: -0.75 percentage points 

The big four’s predictions varied by three quarters of a percentage point – demonstrating that even chief economists, who are highly knowledgeable about and attuned to interest rate cycles, are really only making an educated guess. 

Small wonder that most home buyers and investors are confused about interest rate movements. It doesn’t help, of course, that most people decide to choose or switch to a fixed rate based on commentary about likely variable rate movements. 

The fixed-rate interest cycle always runs about six months ahead of variable-rate interest cycle. That’s why, even though the big four’s recent variable rate predictions differed wildly, their fixed rates are almost identical. Their current three-year fixed rates range from 5.59% to 5.64% – hardly a piece of paper between them. 

Fear and greed: the sure routes to poor decision-making 

History tells us that when the variable rate is rising, a fear of further rate rises drives people to lock in their interest rates. By contrast, when the variable rate is falling, greed drives them to avoid locking in their interest rate. In both cases, they are motivated by a desire to get the timing exactly right. 

The following graph from RP Data shows the percentage of fixed term loans as a proportion of all home loans over the last 10 years.

The graph shows that in 2007, when the share market was booming and interest rates were at 7%, around a quarter of all new loans were fixed. Because a fixed interest rate is essentially a hedge against future variable interest rate rises, most people would have fixed their home loan at this time based on a fear that variable rates would keep rising. 

By contrast, in 2009, when the cash rate was down at 3%, less than 5% of new loans were fixed. Based on a desire to obtain the lowest possible variable rate, the other 95% would have waited until they believed variable rates had hit bottom before making a decision about fixing their loans.