Brother in law's guide: Fixed mortgage rates are nudging higher again

By Bernard Hickey Here's the short version. Longer term fixed mortgage rates began rising again in early August after a couple of months of stability. This will prompt some to jump from floating to fixed as they consider buying for the first time or buying more rental properties. This is despite the Official Cash Rate remaining on hold until mid 2010 at least. This has surprised a few people and may prove politically unpopular, but it makes sense when you look at the underlying drivers for interest rates. It reinforces the view that interest rates have stopped falling, particularly floating rates. There appears nothing to lose by jumping from floating to fixed now.

Firstly, longer term interest rates have risen globally in the last month as governments borrow heavily to finance huge budget deficits and as 'green shoots' of economic recovery emerge to stoke inflation fears. Secondly, the banks' cost of funding new loans continues to pressure rates higher. Part of that is natural as the world sucks debt out of housing markets generally and longer term wholesale rates rise, but part of it is somewhat artificial. At the end of June the Reserve Bank told the banks they needed to raise more money from regular local investors in the form of term deposits and less money from institutional foreign lenders in the form of 'hot money' that rolls over every 90 days. This has pushed the banks to compete harder for term deposits, which is pushing up term deposit rates and therefore funding costs for longer term mortgages. Everyone's situation is different, but those who want certainty for a few years and want to jump before rates rise too much should think of fixing. The chances of being caught out by another slump in mortgage rates in the next couple of years is now low. Longer version to come