It’s currently possible to fix your mortgage interest rates for up to half a percent less than current variable rates... so is this the right time to lock it in?
Fixed rate loans have dropped to their most competitive levels in months, prompting many mortgage holders to lock in their loans.
Commonwealth Bank has dropped its three-year rate to 6.59% while NAB’s three-year rate is down to 6.69%, and non-bank lenders RAMS (backed by Westpac) and ING Direct are down to 6.79% and 6.69% respectively. These are the lowest three-year fixed rates have been all year, down from an average of around 7.5% in February.
“I can rarely recall a more uncertain or complex time for Australian households, and the banks’ fixed rate cut [last week] posed a whole new set of questions for battlers,” says Mark Bouris, founder of Wizard Home Loans and chairman and co-founder of Yellow Brick Road Group.
And now, borrowers want to know: do the deals currently on offer really represent good value, or are lenders simply slashing their fixed rate products to lock borrowers in at a higher rate, because they expect the cash rate to plummet?
Sentiment has turned swiftly in the last two weeks, as it was only at the beginning of August that many economists still predicted at least one or two rate hikes by year’s end.
Last week Australia's unemployment rate increased to 5.1%, when it was expected to remain stable at 4.9%. This, combined with lagging retail sales, global economic turmoil and low consumer confidence, has taken the pressure off the Reserve Bank to lift rates in the near term.
In fact, it actually puts pressure on the central bank to slash rates, which is precisely what many economists are now predicting. Credit Suisse data shows that there is presently a three-in-four chance of a 50-basis point cut when the RBA board meets next meets on September 6.
"It's the first sign the unemployment rate is beginning to drift up [and] it's consistent with other indicators of the labour market – job ads and hiring intentions – that things are actually getting worse,” says Macquarie senior economist, Brian Redican.
"It certainly removes any rationale to tighten rates at this stage. If it continues on for a couple more months, rate cuts will be on the agenda.”
On a $300,000 mortgage, a half a per cent rate cut translates to savings of around $97 a month, or $1,167 per year – although, whether the banks will pass this cut on to consumers remains to be seen. If interest rates fall 1% as suggested
by Westpac chief economist Dr. Bill Evans last month, borrowers could save almost $2,500 per year on a $300,000 loan.
With all of this information at hand, does it make sense to fix your rates at present?
“In today’s volatile financial landscape, consumers are looking for stability, which is why homeowners might be attracted to move into a fixed rate. In capricious times, people crave calm,” Bouris says.
“So, to fix or not to fix? It you take a fixed-rate loan today you might shave 40 to 60 basis points off your annual repayments. But the bond markets are forecasting up to five or six rate cuts over the next year, so it might be prudent to wait a few months to see what the RBA actually decides to do. If the unemployment rate really does start rising rapidly, the RBA could cut rates by a full one to two percentage points.”
It can be confusing to know whether to get a variable rate or fixed rate mortgage, and what features are important. That's why it's important to not only check the right rates, but make sure that you're getting the right features in your home loan. Get help choosing the right home loan