Sunday, August 31, 2008

Fixed rate fix

Yesterday, a customer contacted me about a letter they received from their bank. It was an offer to move from their current variable rate home loan to a fixed rate “to avoid the uncertainty of rising interest rates”

Ordinarily there would be nothing wrong with this. Banks often try to retain customers by getting them to fix their rate for a number of years and in some circumstances this can be advantageous to both the bank and the customer. However, this letter was sent only a few days ago when so much of the current media is devoted to the extreme likelihood of interest rate reductions.

Most of the major banks have already announced substantial reductions to their 2,3 and 5 year fixed rates. They have also begun to reduce their interest rates on a number of deposit products. This is an important signpost for the direction of interest rates for variable mortgages.

After 12 rate rises over the past several years, we may be headed for a period of interest rate reductions. To advertise to a customer to move to a fixed rate “to avoid the uncertainty of rising interest rates” at this time is just a bit shallow, particularly if a series of rate reductions by the Reserve Bank result in a further reduction in short term fixed mortgage rates.

No comments: