The banks might look like they’re going soft by cutting the five-year fixed home rate below 5 per cent, but there’s more where that came from.

Even so, they’ll do just about anything to avoid making an across-the-board cut in the variable rate that most borrowers pay.

Sure, they’ll discount it for new borrowers or existing ones who kick up a big enough fuss, but a far more expensive cut for everybody is something else again.

Mind you, the CBA’s 4.99 per cent isn’t quite what it seems. It comes with a $395 annual fee, but even so.

Frankly, if you’re paying more than 5 per cent, whether fixed or variable, then you’re being ripped off.

And there’s no mistaking the trend in interest rates that, as I’ve been saying for a while, has been down despite the exhortations of the banks’ own economists. Clearly the banks aren’t listening to them and neither is the market.

Come to that the Reserve Bank has little say either. The world is awash with cheap cash and there’s nothing it can do – were it inclined to which it isn’t – about the banks soaking it up.

Just the other day Westpac raised money offshore for less than it had to pay before the GFC.

The days the banks can complain about their funding costs are over, even if this is a bleak turn of events for savers. Watch term deposit rates as the banks quietly drop them further.

If you want to know where interest rates are going you have to follow the smart money that shows its hand in, of all places, government bonds.

That’s probably because there are fewer moving parts to get wrong – the interest rate and maturities are fixed and there’s no credit risk.

But they trade just like shares and the smart money has been ploughing in so the yield has dropped as their prices have soared – just as paying more for a share reduces the return from the dividend even though the amount is fixed.

Without fuss or fanfare there has been a rally in bonds for months.

It’s mostly foreigners buying, including smarties who can borrow at less than 1 per cent and invest it in Australia at over 3 per cent. But so what?

Money talks and I’d be wanting my super fund to moving cash out of the bank and into bonds which pay more, plus come with the juicy prospect of a capital gain.

So should you fix for five years?

Well don’t let me stop you but bear in mind the end game is to pay off the mortgage as fast as you can. Some fixed rate loans let you make additional payments and even have full offset accounts, but they aren’t offered by the banks. And they’re more expensive.

No, it’s safer to mix and fix. Leave some of your loan variable, especially when the rate happens to be lower to begin with and isn’t going anywhere in a hurry, while fixing the rest.

Posted by David Potts Sydney Morning Herald on 27th July, 2014