Borrowers' feast

Another interest rate cut is in the offing, though in this case what's good for the goose won't appeal to the gander at all.

Headline writers will be surprised to learn there are as many self-funded retirees as mortgage holders, which has even prompted the unlikely speculation from some economists that maybe lower rates do more harm than good.

Sounds silly, except they might have a point. From about May last year, when the Reserve Bank rolled two cuts into one, spending by households has been slowing.

Nor did December's cut do anything for Christmas shopping, though, more likely, everybody was waiting for the January sales. Or had left for overseas.

With jobs being lost all over the place, it could be that rate cuts look a bit desperate.

Anyway, the cost of funds for the banks is falling independently of the Reserve Bank, which in any case is tilting towards another cut just in case, especially when the long, drawn-out don't-call-it-an-election-campaign could drain what little confidence is left.

So, if rates are going to stay lower for longer, and perhaps drop further, what should you be doing?

Borrowers can choose between good or even better.

The good is fixing half the mortgage. A fix with your own lender will give you at least a whole rate cut. Shop around, and you could get up to three.

You'd also be locking in at low rates that won't last forever.

When they start to rise again, which, judging by the Reserve Bank's inflation forecasts, wouldn't be before 2015, rates on new fixed terms will be the first to break.

This suggests, incidentally, any fixing you do should be for at least three years, where you'll pay about 5 per cent if you hunt around (just go to canstar.com.au).

By keeping half your mortgage variable, you can make extra repayments if you get the chance and, well, just in case I'm wrong about rates dropping.

The banks' variable rate is about 5.75 per cent after allowing for the discount they give good customers or anybody who asks.

Loyal customers who haven't asked or kicked up a fuss recently would be paying more like 6.4 per cent, so I'd check my next statement if I were you.

But what was that about an even better option than cheaper fixing? Get this. UBank and loans.com.au will refinance your mortgage for what works out at just 5.12 per cent.

That's less than most three-year or longer fixed rates.

Oh, one other point for borrowers. If you've just signed on for a mortgage, try to pay off more than you have to. The first couple of years are loaded upfront with interest, so that's all you're paying. Add a bit more and you'll eat into the principal and save a fortune over time.

For lenders, unfortunately the choice boils down to the lesser of two evils.

Either stay short and reap higher interest that will probably drop soon, or go for a cocktail of terms so you still have some flexibility. ME Bank is paying 5.10 per cent.

Did you notice that's just a smidgen less than the lowest home-lending rate? So did I.

The only catch is that you also have to link it to a transaction account that doesn't pay interest, though at least there's no fee, either.

This rate is well above what you'll get on a term deposit, even for five years.

The safest bet is keeping some as online cash, and fixing for a few different terms up to two years, which seems to be the sweet spot for term deposits.

Twitter @moneypotts