Investor alert: rate hike coming soon

An increase in rates is already being predicted for as soon as first thing next year, signalling bad news for mortgage holders, according to RateCity.

CEO of RateCity, Alex Parsons, said that indicators are currently suggesting we may be close to a rate increase.

Fixed interest rates are used to gauge market sentiment due to fixed rates typically moving one step ahead of the cash rate and as a result variable rates. The gap between them is being seen to narrow.

“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,” Parsons said.

“When banks ‘price’ fixed rates significantly below variable rates, it suggests they expect rates to fall further," he said. 

Currently, the gap has narrowed to 0.79%, suggesting less chance of another rate cut.

“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," he said.

“Our data suggests there is one more cash rate cut on the horizon this year and we’re betting on a Melbourne Cup day cut in November.”

While he said it was a little early in the cycle to predict when rate increases would then occur, it may be 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. 

“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 rates increases."