Interest Rate Outlook for 2013 – Variable or Fix?

As a professional who makes a living out of helping people find the right lending option and loan structuring outcomes,  I know I will get asked what should ‘we’ meaning my clients,  be doing regarding our lending in 2013.

Everybody got your Crystal Balls out?

Good, because we are going to need them to pick what is going to happen with Interest Rates next year.  I make this tongue in cheek statement, purely because it’s simply never easy to pick what will eventually transpire with interest rates next year.  However in my efforts to make you better informed I have broken down this article in to two topic headings to try to make more sense of what I am saying.

What we know now:

• The Cash Rate is at record lows.  The current cash rate is at the same level as it reached back when the GFC was in full swing. (3%).  This time around however the banks have not passed on the same amount of cuts they passed in the previous GFC downward cycle, so we are paying more to service our debt than we did back then.
• As I write this the financial Markets are predicting a further 2 cuts in the cash rate in 2013.  One in the first half of next year and the other in the second half, totalling 50 basis points
• Currently in the economy, Inflation is running within the RBA comfort range of 2 – 3%.  Current rate as per the RBA website is listed as 2%
• The Australian dollar continues to trade around the 1.04 – 1.05 US cent range.  So the existing RBA moves to try to help bring the dollar lower, through the easing of monetary policy is not having the desired impact our exporters and the RBA were hoping it would (currently)
• The Mining Boom is reportedly slowing.  The profit margins enjoyed during the commodity boom are slowing as the prices fall from their peaks.  Some commodity prices have recovered from recent lows, but the outlook for high commodity prices in the short term are looking less likely.  So the growth engine of our economy which was driving our GDP will need to come from somewhere else if we are to continue to see solid GDP numbers moving forward.

What we don’t know now:

• What is going to happen to the EURO and the countries in political and economic strife, namely Greece, Spain, Portugal and Italy?
• Will the US economy gain further growth momentum, and will it be a housing led recovery, given it was a housing led collapse?
• Will China see its growth story continue and will it be led by internal consumption as opposed to the export success of the past?
• Will the Federal Government and their pursuit of this ‘Surplus’ budget have an impact, as they starve the economy of any stimulus spending, potentially impacting GDP performance?

 

As you can see by the ‘known and the unknown’ they all could play a part in the overall outcome of what happens to interest rates in 2013, hence the Crystal ball statement is a funny, but valid one.

Regarding your own situation you should be looking at what plans you might have in store for 2013, as this could actually lead to you needing to release some equity, pay down a lump sum, renovate, buy a car, buy your first home or first investment property as examples.  So you could be forced to think about your home loan when you didn’t really care.

In putting myself out there in calling the market for 2013, I think there is a possibility of up to two more interest rate cuts, but that’s only if things deteriorate globally, as opposed the domestic story, which for the record,  I think it going to a little better than most think it will be.

So as I write this article for our December 2012 newsletter, I would be potentially considering not to put all your loan into a fixed rate position, but with fixed rates also currently being priced more attractively than the current variable rates, you might want to consider a mix of variable and fixed, but your personal circumstances would need to be assessed professionally before making any recommendations on what percentage I’d keep variable and what percentage and for what period you should fix for.