Gap closes between fixed, variable rates

EXPECTATIONS that interest rates will be steady in coming months have narrowed the gap between fixed and variable loans.

A three-year fixed interest rate mortgage has dropped to within 16 basis points of the average standard variable rate, according to ratings agency Canstar Cannex.

''Following the Reserve Bank's cash rate increases and fixed rates remaining somewhat constant, fixed and variable are now almost sitting at parity,'' Canstar Cannex financial analyst Mitchell Watson said.

Advertisement: Story continues belowCurrently, the average standard variable rate is 7.38 per cent, while the average three-year fixed rate is 7.54 per cent.

The RBA kept interest rates on hold at 4.5 per cent this month, after global markets were spooked by the European debt crisis. The June pause comes amid a rate rise cycle that began in September last year, with the RBA lifting the cash rate six times since then.

Investors are pricing in a 4 per cent chance of a rate cut in July, according to Credit Suisse data.

By June 2011, the market is forecasting an interest rate of 4.75 per cent.

''Borrowers could see this as an opportunity to reduce the risk of fixing, but they need to be aware that fixing a home loan is a long-term decision and very much a gamble, so it really does depend on your own individual circumstances,'' Mr Watson said.

The average one-year fixed rate mortgage is 6.95 per cent, while the average two-year rate is 7.39 per cent. Longer-term fixed rate mortgages cost more, with the average four-year fixed rate at 7.87 per cent and the average five-year rate at 8.03 per cent.

Canstar Cannex estimates that a borrower on a three-year fixed rate loan in October would have spent $9600 on monthly payments so far, while a borrower who took out a three-year loan in April last year would have saved $1400.