With banks battling it out on fixed mortgage rates, mortgage owners may be attracted to switch from a variable home loan to a fixed home loan.

"The banks have been taking matters into their own hands in recent weeks, acting on, among other things, speculation that the RBA will cut again soon," said Peter Arnold of RateCity.com.au.

While some lenders have dropped their three-year rates to 3.67 per cent and their five-year rates to 3.99 per cent, Arnold argues that over the past two decades, variable rate borrowers were still better off 63 per cent of the time than those who opted for a fixed rate.

Locking in reduced rates when the rates are low can protect mortgage owners against a rise in variable rates when the cycle turns. However, Shane Oliver, head of investment strategy and chief economist at AMP Capital, says there are problems with this.

“Firstly in a normal cycle, this would work well but lately, we have been seeing rates go lower and lower,” he said. “So someone locking in what seemed to be a low fixed rate two years ago of 5.2 per cent for three years when discount variable rates were 5.1 per cent would now be feeling they acted too early because three-year fixed rates are at 4.4 per cent and discount variable rates are at 4.6 per cent with little prospect of a rise anytime soon.”

Another problem is that borrowers fix out of desperation when the rates are high because they can’t afford an even higher level of variable rates, hence making them miss out when the cycle turns down.

“This bad experience partly explains, I think, why fixed rates are not so popular in Australia compared to the US,” Oliver said.

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