How do I do that?

Probably the first thing to realise is that no-one rings a bell to let you know when it's the best time to fix. But if you're watching interest rates fall, and thinking you'd like the security of a fixed-rate loan, there are times when it is better to fix than others.

Unfortunately, those times are a bit counter-intuitive. Most people think of fixing when variable rates are starting to rise. But by the time that happens fixed rates have often already moved up as the graph shows.

For example, in 1994 fixed rates bottomed at 8.75 per cent in June (the same level as variable rates). But three-year fixed rates had risen to 10.25 per cent in August, before a variable rate hike to 9.5 per cent in September.

Similarly, fixed rates bottomed at 6.4 per cent in February 1999, just below variable rates, which had hit their low of 6.5 per cent in December. But by March fixed rates had risen to 6.65 per cent. And by the time variable rates rose to 6.55 per cent in July, fixed rates were about 7 per cent.

Why does that happen?

It's fairly simple. Variable interest rates are closely linked to the official rates on cash set by the Reserve Bank. That's why a rate announcement by the Reserve, such as last week's rate cut, is swiftly followed by rate changes on variable-rate home loans.

But fixed-rate home loans are much more dependent on what's happening on the wholesale money markets. The major influence on fixed home loan rates is the wholesale interest rates being offered on investments with similar timeframes. So if the yield on three-year government bonds falls, for example, you'll find lenders are able to reduce the rates on three-year fixed-rate home loans.

Andrew Willink, the managing director of researcher Cannex, says these wholesale rates change quickly according to supply and demand. If buyers believe, for example, that interest rates are likely to fall, they'll drive down the yield on wholesale investments such as bonds long before the Reserve Bank makes its official cash policy known. So fixed rates respond much more quickly to expectations of where rates are headed than variable rates. So how can I tell if it's time to fix?The first question to ask, says Willink, is whether there's any benefit in doing so. Obviously, he says, if you're going to be paying much more on a fixed rate, there's probably no benefit. But if the fixed rate is the same as your variable rate or, better yet, lower it may be worth considering.

Unfortunately, because wholesale investors generally demand a higher interest rate for longer-term investments, it's more common for fixed rates to be higher than variable rates.

If there is an immediate benefit, he says, you then need to do a reality check. Ask where we're at in the economic cycle and whether rates are likely to fall further. If they do, he says, you may find you'd have done better with the variable-rate product.

Is that the case now?

It's impossible to say for sure, but the word from the Australian and United States central banks is that further rate cuts are likely. Willink says this is reflected in the pricing of home loans, with three-year rates being at similar levels to standard variable rates.

He says investors, in particular, need to think carefully before fixing as the danger at the moment is that they are locking in their interest costs, but, because the rental market is soft, they may find they can't lock in the income from their property as securely. There will also be penalties if they want to get out of the fixed-rate loan early.

Is there an alternative to fixing?

Willink advocates a "pretend fix" simply maintaining your old repayment levels and ignoring the rate cut on your variable loan. He says borrowers who did this at the start of the year, when variable rates were 8 per cent, would theoretically have cut 80 months off a 25-year loan. In reality, he says, it won't happen like that, but by maintaining the old repayments you're saving money, building a buffer against future rate rises, and maintaining the discipline of higher repayments.