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Should you cash in on slashed fixed rates?

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Nila Sweeney
Fixed rate loans are currently available for up to half a percent below variable rates – or more – but does this mean banks are expecting a hefty cash rash cute?
 
The short answer is yes, but when and how much is anyone’s guess.
 
Borrowers are presently faced with the possibility of locking in a three-year fixed rate of around 6.5%, as opposed to an average variable rate of 7%. On a $300,000 loan, the lower fixed rate equates to savings of $1,500 per year or $125 per month, which is enough for a cheeky weekend away with the family, a big screen TV or enough petrol to keep the car tank fuelled for an entire year. 
 
But does it make sense to lock in your rate now, if there’s a chance the banks will slash interest rates by even more than 50 basis points in the next few months?
 
Economists are largely divided in their predictions of where interest rates are headed, although the majority agree that the Reserve Bank will at least keep interest rates on hold for now. This is in stark contrast to just two months ago, when the RBA was widely tipped to lift interest rates at least twice before Christmas.
 
With the jobless rate hitting an unexpected 10-month high this month, a rate increase now seems highly unlikely. “The silver lining is that it increases the prospects that rates are coming down,” confirms Shane Oliver, head of investment strategy at AMP Capital Investors. And while this prediction is music to the ears of variable rate mortgage holders, it’s not great news for the country as a whole.
 
“As a mortgage holder, it might seem like positive news to see the market forecasting some fairly dramatic cuts to our interest rates, but it needs to be remembered that rate cuts are designed to stimulate a struggling economy. A weak economy will generally mean slow wage growth and increased unemployment,” says Linda Clucas, Smartline Personal Mortgage Adviser.
 
“The question to be asking yourself right now is whether it is better to ride the variable rate roller coaster, as 85% of Australian mortgagors currently do, or get off at the nearest fixed rate station.”
 
The recent reduction in fixed rates doesn’t seem to have translated to a stronger take-up of these types of loans just yet, with Mortgage Choice figures showing that fewer than one in seven new mortgage holders fixed part or all of their home loan rate in August.
Mortgage Choice spokesperson Kristy Sheppard believes borrowers’ reticence to fix may be influenced by memories of the break costs many people faced a few years back, when the cash rate fell from 7.25% to 3.00% and home loan interest rates plunged.

“I expected the take-up of fixed rate home loans to grow noticeably in August, due to the well-publicised reductions many lenders have been applying to their fixed term pricing,” she says.  
 
“Instead, new borrowers’ appetite for ongoing discount home loans has steamed ahead for 10 consecutive months now… The trend speaks volumes about new borrowers’ and refinancers’ mindset around interest rate rises and the value they place – or rather, don’t place – on locking in their rate at the moment.”

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