If banks offer a fixed rate lower than the variable rate, is that an indication interest rates may head down?
"This is known as an inverted yield curve. It is rare, and can be caused by a few things, as discussed at the link. It can be because the view is that the economy will slow and therefore interest rates will go down. It is not caused by ""secret"" preparation. It could also be that there is generally in the world a move towards safer investments, making their interest rates cheaper. If I had to guess (and this guess is worth what you paid for it) it is because Australia's interest rate is significantly greater than other parts of the world, long term lower risk investment is being attracted there, as it gets a better return than elsewhere. This is pushing rates lower on long term bonds. So I would not take it as an indication of a soon-to-be economic downturn simply because in this global economy Australia is different in ways that influence investment and move interest rates." Usually that is the case that when fixed rates are lower than the variable rates, it is an indication that the banks feel the next movement in rates could be down. You also need to look at the fixed rates for different periods, for example 1 year fixed compared to 3 year fixed and 5 year fixed rates. If you find the 3 and 5 year fixed rates are higher than the 1 year fixed rates this could be an indication that the banks feel rates will fall in the short term but the falls won't last long and will continue to rise after a year or so. If the 3 year fixed rates are also low in comparison, then the banks may feel that the economy is heading for a longer term down trend. The banks won't want to lose out, so will change their fixed rates on their perception of where they feel the economy is headed. Since your post in May 2011, the standard variable rate has since dropped twice (in November and December) to be at 7.30%. You will also find that fixed rates have also been dropped further by the banks, indicating additional future cuts in the variable rates. Regards, Victor
You're not crazy, but the banks are. Here's the problem: You're taking 100% LTV on property A - you won't be able to get a second mortgage for more than 80% total (including the current mortgage) LTV. That's actually something I just recently learned from my own experience. If the market is bad, the banks might even lower the LTV limit further. So essentially, at least 20% of your equity in A will remain on the paper. Banks don't like seeing the down-payment coming from anywhere other than your savings. Putting the downpayment from loan proceeds, even if not secured by the property which you're refinancing, will probably scare banks off. How to solve this? Suggest to deal with it as a business, putting both properties under a company/LLC, if possible. It might be hard to change the titles while you have loans on your properties, but even without it - deal with it as if it is a business. Approach your bank for a business loan - either secured by A or unsecured, and another investment loan for B. Describe your strategy to the banker (preferably a small community bank in the area where the properties are), and how you're going to fund the properties. You won't get rates as low as you have on A (3.25% on investment loan? Not a chance, that one is a keeper), but you might be able to get rid of the balloon/variable APR problem. The United States Federal Reserve has decided that interest rates should be low. (They think it may help the economy. The details matter little here though.) It will enforce this low rate by buying Treasury bonds at this very low interest rate. (Bonds are future money, so this means they pay a lot of money up front, for very little interest in the future. The Fed will pay more than anyone who offers less money up front, so they can set the price as long as they're willing to buy.) At the end of the day, Treasury bonds pay nearly no interest.   Since there's little money to be made with Treasuries, people who want better-than-zero returns will bid up the current-price of any other bonds or similar loan-like instruments to get what whatever rate of return that they can. There's really no more than one price for money; you can think of the price of those bonds as basically (Treasury rate + some modifier based on the risk) percent.  I realize thinking about bond prices is weird and different than other prices (you're measuring future-money using present-money and it's easy to be confused) and assure you it ultimately makes sense :) Anyway. Your savings account money has to compete with everyone else willing to lend money to banks. Everyone-else lends money for peanuts, so you get peanuts on your savings account too. Your banking is probably worth more to your bank on account of your check-card payment processing fees (collected from the merchant) than from the money they make lending out your savings (notice how many places have promotional rates if you make your direct deposits or use your check card to make a purchase N times a month).  In Europe, it's similar, except you've got a different central bank. If Europe's bank operated radically differently for an extended period of time, you'd expect to see a difference in the exchange rates which would ultimately make the returns from investing in those currencies pretty similar as well. Such a change may show up domestically as inflation in the country with the loose-money policy, and internationally as weakness against other currencies. There's really only one price for money around the entire world. Any difference boils down to a  difference in (perceived) risk. The key word you are looking for is that you want to refinance the loan at a lower rate. Tell banks that and ask what they can offer you. "I am lucky enough to have chosen a flexible mortgage that allows me to change payment amounts at certain, very lenient intervals (to a minimum amount).  So when I was laid off, the first thing I did was call my bank to lower my payments to a level that allowed me some breathing room, at my new, lower income.  If and when my family's income increases, I'll re-adjust my payments to a higher amount.   But if you're concerned about the ""what if""s in this economy, I'd definitely choose a mortgage that allows for flexibility so that you don't lose your house if you don't have to, particularly if your situation is temporary." Makes sense so long as you can afford it while still maintaining at least six months living reserves. The sooner you own outright a decreasing asset the better which should be considered when selecting your loan term. However, with today's low rates and high performing stock market you may want to consider allowing that money to be put to better use. It all depends how risk adverse you are. That emotional aide of this decision and emotions have value, but only you can determine what that value is. So - generally speaking, the sooner you own an asset of decreasing value the better off you are, but in exceptionally low interest rate environments such as today there are, as mentioned, other things you may want to consider. Good luck and enjoy your new ride. Nothing better then some brand new wheels aye. I am currently in the process of purchasing a house. I am only putting 5% down. I see that some are saying that the traditional 20% down is the way to go. I am a first time homebuyer, and unfortunately we no longer live in the world where 20% down is mandatory, which is part of the reason why housing prices are so high. I feel it is more important that you are comfortable with what your monthly payments are as well as being informed on how interest rates can change how much you owe each month. Right now interest rates are pretty low, and it would almost be silly to put 20% down on your home. It might make more sense to put money in different vehicle right now, if you have extra, as the global economy will likely pick up and until it does, interest rates will likely stay low. Just my 2 cents worth.  EDIT: I thought it would not be responsible of me not to mention that you should always have extra's saved for closing costs. They can be pricey, and if you are not informed of what they are, they can creep up on you. Asset prices are inversely related to interest rates. If you're valuing a business or a bond, if you use a lower interest rate you get a higher valuation.  Historic equity returns benefit from a falling interest rate environment which won't be repeated as interest rates can only go so low.  edit: typo I've recently started studying a bit of finance (I am a software developer) and have a question regarding the Bank of England (BoE) announcement.    The BoE agreed in maintaining its current interest rate (0.25% I think), although it announced it would be buying GILT (Government Bonds), wouldn't the purchase of bonds by a central bank make the interest rate move down?   Isn't the goal of a central bank purchasing bonds, to move the interest rate? Is there a difference between adding liquidity to the market (increasing money supply) and changing the interest rate? Can these two things be separated?  Thank you :) "Since I can't vote up the answer yet, I will agree with it here. I find the best tactic when you call is to tell them you have an offer in hand and will use it if they don't match the rate exactly or discount it enough to save you the trouble of going through the process of a balance transfer. So if they balk and say ""No,"" then walk and go (to the in hand offer). Just remember, the worst they can say is ""No.""  If you don't even bother to ask, it's as if you did and they said ""No,"" as either scenario leaves you with the same result: an unchanged interest rate." Interest rates are market driven. They tend to be based on the prime rate set by the federal reserve bank because of the tremendous lending capacity of that institution and that other loan originators will often fund their own lending (at least in part) with fed loans. However, there is no mandatory link between the federal reserve rate and the market rate. No law stipulates that rates cannot rise or fall. They will rise and fall as lenders see necessary to use their capital. Though a lender asking 10% interest might make no loans when others are willing to lend for 9%. The only protection you have is that we are (mostly) economically free. As a borrower, you are protected by the fact that there are many lenders. Likewise, as a lender, because there are many borrowers. Stability is simply by virtue of the fact that one market participant with inordinate pricing will find fewer counterparties to transact. Some good and some bad here. The bad amounts to the fact that consumers are missing out on potential opportunity in the markets due to fear. Any financial advisor or analyst can tell you that there are a multitude of ways to enjoy the markets while limiting risk. You may not make a Million but, you will likely beat the savings account rate. On the good news front it is great that Americans continue to shed debt and are hesitant to take on more. Somewhere in the middle is the fact that some borrowers who may be able to qualify for lower rates can't get them due to depreciated home values. The bottom line there is that if you can afford your mortgage, be happy. You don't NEED to refinance for a lower rate, our grandparents never refinanced and they did ust fine. "When ""people say"", each person is referring to whatever he/she is looking at.  Interest rates tend to move roughly the same, but often there is a bias regarding long vs. short term.  In the US right now, short term interest rates are very low but there is a lot of chatter saying they will rise in the future.  The differential between long term rates and short term rates is high compared to historical norms, suggesting that the market believes this chatter.  You can also look at the differences in rates between different quality levels.  If the economy is improving, the difference in rate for lower rated debt vs. higher rated debt decreases as people think the chance of businesses failing is decreasing. Right now, any interest rate you look at is well below long term historical averages, so asserting that interest rates are low is quite safe." If economic conditions are weakening, i.e. unemployment rising, business and consummer confidence dropping, etc., you can expect interest rates and thus mortgage rates to drop. If economic conditions are strengthening you can expect interest rates and thus mortgage rates to start rising. As you are in the US, and with official interest rates there at 0.25% there is not much room for these rates to fall further. I am in Australia, with official interest rates at 3.75%, and with the economic weakness in the US and Europe and with China slowing down, we can expect our rates to fall further over the next year. Regarding your timeframe of one to two weeks, unless there is a decision on rates in the US in the next week I don't think there would be much change, especially with rates there at record lows. You are probably best to shop around for the best rates now and refinance once you have found one you are happy with. Some loans have a variable interest rate which can protect the lender from inflation and the borrower from deflation. How much protection it offers depends on how closely the interest rate follows the inflation/deflation rate. Most variable rate loans have limits on how much and how frequently they can adjust. In your deflation scenario, the lender comes out ahead with a fixed rate loan already, since those future dollars are worth more than current dollars.  The borrower doesn't owe more dollars, but the value of the dollars they owe is higher. "The reason to put more money down or accept a shorter maximum term is because the bank sweetens the deal (or fails to sour it in some fashion).  For example, typically, if there is less than 20% down, you have to pay an premium called ""Private Mortgage Insurance"", which makes it bad deal. But I see banks offering the same rate for a 15%-year mortgage as for a 30-year one, and I think: fools and their money.  Take the 30-year and, if you feel like it pay more every month.  Although why you would feel like it, I don't know, since it's very difficult to get that money back if you need it."