Fixed outlook not all it's cut out to be

There's talk the Reserve Bank is done with cutting interest rates, and some fertile, or perhaps febrile, minds are even suggesting it might be ready to lift them.

Well, it can't, the bank has told us.

It's made no secret of the fact that it doesn't know when it will next adjust rates, but its default position is that they are more likely to be heading downward rather than up.

That said, the market's job is to suss out when the rate cutting is likely to be over, even before the Reserve knows.

And we seem to be at a watershed.

The pressure on variable rates is still down - the banks are now discounting by 1 per cent - but is rising on fixed-term offers.

A good signal is government bond yields because they show how much it costs to raise money for different lengths of time.

Being risk free, the return on a bond is a benchmark for all other rates.

The odd thing is you could earn more by buying a bond with three months to run than one lasting three years. In fact, the three-year rate was even under the overnight rate banks can get from the Reserve Bank.

So much for making a long-term financial commitment.

That's why rates on fixed-term home rates have been lower than the standard variable, and that online at-call rates are higher than those on a two-year term deposit.

But bond yields have just flipped over so the cash and three-year rates are virtually the same. In which case things are about to change for borrowers and savers alike.

For a start, the gap between fixed and variable mortgage rates is closing.

You can fix below the variable rate if you hunt around, but it's hardly worth the hassle. The lowest variable rate is State Custodians' 4.99 per cent, which is identical to ME Bank's three-year fixed rate.

Oops, should look at the comparison rate, which takes fees into account. It then becomes 5.35 per cent compared with UBank's 5.12 per cent, which at first blush seems dearer.

But you don't want to get carried away by the comparison rate. It's useless for comparing variable with fixed loans.

The reason is that it assumes you'll switch to that lender's variable rate at the end of the term when I'm sure you would be looking around at that time for whatever 's the best offer.

Anyway rather than play spot-the-rate-move, especially when it's lineball between variable and fixed, it's better to do a bit of both.

In fact, keep some of your mortgage variable and have a mix of different terms for the fixed part.

Besides, paying more of the mortgage off sooner will save you more than a rate cut difference here or there gained by fixing.

It's trickier for savers. It might not feel like it, but banks are doing you a favour because for the first time since the global financial crisis they can borrow more cheaply offshore than from you and me.

So you can be sure they'll drive deposit rates down.

For a while overnight rates have been better than on anything but very long-term deposits, a mirror of the bond market.

And so this has flipped around, too.

Again there's not much in it, but a term deposit past two years pays better than the at call online rate.

But remember bond yields are rising, so must those term-deposit rates.

Twitter @moneypotts