It's the first Tuesday of the month and for some of us, it's like Christmas Eve. Santa (in the form of the Reserve Bank) is on his way and we're all hoping that he'll bring us something nice, such as another 1.00% drop in interest rates.

It's funny though, less than a year ago most people would have laughed at the thought of the RBA dropping rates by as much as 1 whole percent.  After 8 or more successive interest rate hikes, rates dropping by even half a percent would have been a relief for many people and so the majority of us were shocked when they fell by so much.

Now some time down the track after a couple of big drops, I think some people would actually be disappointed if the rates dropped today by less than the speculated 1 percent.

It's interesting to see how many people out there are holding off on purchases waiting for the perfect conditions.  I've spoken with a few people lately who are determined to wait until rates are at their lowest and house prices have fallen.  I wonder how many of these people will be left behind simply because the conditions were never quite optimal enough for them?

For me, the most frustrating thing is the constantly asked question of "What should I do, fix now or go variable?"  I can't help but be overly cautious when that question is asked.  Effectively, that question is asking me to try to predict what is going to happen with interest rates.  Now, variable rates may fall even further, granted, but if the banks economists believe that the future looks like having a reversal then we'll see the 3 to 5 year fixed rates increase, so what does that mean.

At present, it's possible to get 3 year fixed rates at around 5.5%.  The standard variable rate is around 6.8% and is very likely to change today.  But even if today the variable rate drops to 5.8%, the 3 year fixed at 5.5% is still better.

But, let's look at it from another angle.  What if you ignore what's happening around us at the moment (hard to do with the world media, but give it a go).  Rental returns are generally very good at the moment, it's not unreasonable to be able to find yields of between 6-8%.  Comparatively speaking to the last 20 years of Australian economic history, a bank interest rate of 5.5% is cheap.  It's certainly a much better proposition than the 8.5-9% we were seeing a year ago.  It all comes down to what you are comparing the rate to and whether you will feel disappointed if rates come down some more after you've fixed, or whether you will relax knowing that you've fixed in at a very affordable rate and can have the peace of mind of not having to worry if rates go up again.

It's a personal thing.  As a broker, I just sit on the fence and tell my clients that they have to do what they feel comfortable doing.  I tell the clients that it's all about whatever helps them sleep best at night.