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With the markets predicting more rate cuts, borrowers and savers alike need to get set.

Well at least somebody is happy. The economy is as good as the Reserve Bank governor Glenn Stevens thinks he’s seen in his 40 years as an economist.

Oh dear, talk about tempting fate. Anyway, I take it he won’t be cutting interest rates after the board meeting on Tuesday.

Fair enough, the Reserve Bank wants to rest on its laurels – all that earlier rate cutting quite took its breath away – but the smart money is banking on three more cuts by next May, concentrated toward the end of this year.

So what are you supposed to do when the Reserve seems to be pulling one way and the market another? Fix the mortgage – or commit to longer-term deposits as the case may be – and you could have the rug pulled from under you.

Perhaps I can help.

It sounds silly but the best – no, only – time for fixing is when the market thinks rates will drop.

It’s the same principle as buying shares when everybody else is selling. Or selling when the mob is buying. Not easy, I know.

The thing is the banks monitor the money market, where they get almost half their money, which itself is predicting where rates are going.

Any expected rise or fall in rates is consequently captured in fixed mortgages straight away.

So when they’re rising, you’re paying higher rates before they’ve even happened. But when they’re falling you get the cuts early.

The point is the market thinks rates will drop again, which is why fixed mortgages come as low as 5.54 per cent at UBank for three years (making it a smidgin under its variable rate, which Canstar says is also the cheapest, were it not for slightly higher fees). Asking for anything lower than this and, I’m sorry, you’re being greedy.

But don’t fix the whole mortgage because you want some flexibility. Or in case I’m wrong.

Mind you, should the Reserve cut another 0.75 per cent you couldn’t, um, bank on the banks passing it all on. They wouldn’t be able to since the reason for rates dropping would be a debt implosion in Europe, or its recession turning into a depression.

In which case offshore borrowings would cost more – that’s if the banks could still get them.

For the Reserve the restraint is the dollar which is already starting to fray along with commodity prices. It won’t want lower rates pulling the dollar down too far because that would be inflationary.

The beauty is the market doesn’t have to be right that rates will fall. It just has to think it for fixed mortgages not to have much downside. Likewise, term deposits don’t have much upside. Besides, when one- to five-year term deposits paying more than 5.2 per cent are just one rate cut away from the cheapest mortgage, all I can say is be grateful for small mercies.


Posted by David Potts – The Age on 2nd September, 2012