Rate hike looms

The interest rate slide may be coming to an end, with new research suggesting rates could start to climb as early as next year, signally some relief for savers but bad news for borrowers.

Latest research from RateCity has found the gap between fixed and variable interest rates is narrowing – a strong indication that lenders think rates are close to bottoming out.

Alex Parsons, chief executive of RateCity, said fixed rates were one indicator used to gauge market sentiment as fixed rates typically moved one step ahead of the cash rate and therefore variable rates.

“Since before the first round of rate cuts in November 2011, fixed rates have been consistently tracking at around 1 percentage point below standard variable rates,” he said.

“We know that most people are on discounted variable rates with the major banks, which are usually around 0.70 percentage points lower than advertised rates, meaning fixed and variable rates are almost on par – in other words the gap is closing.”

Parsons said the data showed there was room for one more cash rate cut this year and tipped a Melbourne Cup day cut in November.

But with interest rates at all-time lows he warned that it’s inevitable that rates will start to rise and could happen as early as 2014.

“We know fixed rates usually start rising well before variable rates, and borrowers often miss the lowest point. After all, the banks have a far better chance of predicting future rate movements than the average punter,” he said.

“Based on this logic, borrowers who are interested in fixing should keep a close eye on rates over the coming months and be ready to act on signs of fixed rate increases.”

RateCity data shows fixed interest rates are available from 3.99 percent for a 1 year term, while variable rates start from 4.49 percent.

Parsons warned borrowers against overstretching their budget and urged people to prepare financially for the possibility of higher costs of servicing a loan.

“Interest rates are at record lows and for many young Australians the prospect of buying their first home is suddenly a reality.

“But borrowers should prepare for the eventuality of higher interest rates in the future and make sure they could comfortably afford to service the loan if rates increased to the historical average of around 7 percent or even higher.

“We typically suggest borrowers commit no more than one third of their income to repaying the mortgage, any more than that and they could find themselves in mortgage stress.

“It’s really important that borrowers don’t overstretch the budget because this can only lead to tough times when rates eventually do increase.”

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