Are Fixed Interest Rates Too Good to Pass Up?

with 4 Comments

As the major banks cut their fixed interest home loan rates this week lots of people have been asking this question.

The following article appeared in the Sydney Morning Herald. If you’d like to share your thoughts and comments, and I’d encourage you to do so please, you can do so on the bottom of our blog page here as I have done.

Bank-as-House-600“The Commonwealth Bank, National Australia Bank and Westpac on Wednesday cut their longer-term ­interest rates to below 5 per cent. Home loan customers should take advantage of low fixed interest rates and lock in now, experts say.”

“Competition in this market has finally bred benefits for consumers; 4.99 per cent on a five-year home loan is very sharp. It is an excellent deal,” said Alex Parsons, chief executive of interest rate research company RateCity.

“Will rates keep coming down? No. Non-banks have had below 5 per cent for a while. Now banks have joined in.”

Interest rate advisers all agree conditions are ideal for a switch to fixed rates.

“Our monthly Reserve Bank surveys say the interest rate is due to rise in the next year. It is likely that the interest rate will drop before rising again to normal levels, but at the moment this is a good rate,” spokeswoman Michelle Hutchison said.

“Historically, cash rates have been around 5 per cent and interest rates another 2 per cent higher. So we are now near the bottom of the cycle.”

Rates may drop before they rise, but borrowers are better off locking in the rate now rather than speculating.

“Even with a possible rate reduction you still get comfort from hedging your bets against the possibility of rates ­eventually going up,” 1300 Home Loan managing director John Kolenda said.

AMP Capital’s chief economist Shane Oliver, agreed, saying economic indicators showed borrowers needed to take advantage of the low rates.

Is it a roll of the dice or a calculated guess?

“Fixed rates are normally higher. Average inflation tells me the RBA will not stay at the current rate,” he said.

Rate rise likely in nine months

Dr Oliver predicted a rate rise was likely to be about nine months away, around the June quarter next year.

“The banks are offering this deal because they can. Costs of borrowing have dropped and are consistent with Australian bond yields falling.”

A combination of economic factors including improvements in the global capital market with lower spreads have resulted in the cheaper cost of money.

“Last year some mortgage providers were already doing 5 per cent. So to avoid losing market share, the big banks have joined in,” Dr Oliver said.

He cautioned the low rate deals may not last because banks would have only a limited amount of money at low rates.

But Mr Kolenda said borrowers must be sure they are switching for the right reasons, such as certainty of repayment and peace of mind rather than as a speculative play on where rates are going to move.

“Many committed to fixed rates just before the global financial crisis and watched the rate drop to a low of 3 per cent,” he said.

Fixed rates are also not ideal for ­people on high salaries.

The Banks won't miss you
The Banks won’t miss you

“If you lock it in now, and want to repay chunks of the loan, you may have break costs. Also, are you upgrading your loans, or having another child?” Canstar research manager Mitchell Watson said. He recommended splitting loans between variable and fixed rates to “get best of both worlds”.

Interest rate adviser Mozo is more conservative, saying consumers must watch the rates for the next few weeks.

“We may not be at the bottom yet,” director Kirsty Lamont said. “This is the start of what will be more pressure on fixed rates. Other lenders will match if not undercut the rates.”

  • My personal view is that interest rates are unlikely to rise for quite some time, considering all the uncertainty that’s out there in the market place at present, so no need to rush. In fact I think that there’s a distinct possibility of rates going down whether by RBA cutting or the banks themselves. When and if they do rise I don’t think it will be to previous levels or if so it will be quite some time before they get there in my view. The RBA would just love to see the value of the aussie dollar come down and cutting interest rates to be closer to our major trading partners would help achieve that it’s only that they are majorly worried about heating up property prices, especially already built stock that’s stopping them from lowering now in my view. That’s one of the reasons they regularly release stories to the press that have a negative bent about buying property, or just plain scaremongering such as around September / October last year about that ‘Property Price Bubble’. They don’t have the full array of legislative tools they once had such as the LGS & SRD & the big banks have demonstrated that they can and will run their own race, so the RBA resorts to press releases such as the recent one comparing renting to owning a house. maybe the RBA will seek out other means of curbing property buying / prices – we’ll see.

    Fix rates? In my memory every time I saw banks promoting fixed rates they dropped the variable rate soon after

    8 Aug 2014, Adrian Stagg,

  • The long term average for the variable rate in Australia is 7.2%. Fixed for five years at 4.99% or thereabouts certainly gives investors confidence in knowing what their largest outgoing will be for five years. I guess everyone has their own personal circumstances to consider, but I suspect that in five years time, 4.99% will look very cheap. The risk is that when people come off that rate, will their pockets be deep enough to pay the new rate?

    8 Aug 2014, Matt Goss, National Property Research

  • Certainly the certainty of knowing what the mortgage payment will be month in month out would be attractive to some. After all there aren’t very many certainty’s in life other than death and taxes. One other certainty though is ‘change’ and that’s where fixed loans can start to cost money. If one decides to sell unexpectedly through a change of mind to hold, a change of job, marital breakdown etc etc the list goes on – the banks don’t miss out when it comes to early payouts. There’s even limitations when it comes to increasing mortgage payments with fixed rate mortgages.

    If you want some comfort through fixing my suggestion is to fix a part of the loan and keep some variable.

    8 Aug 2014, Adrian Stagg,

  • My thoughts on fixed interest rates haven’t changed since my comments made in July 2014 above and I’m pleased that I didn’t jump into fixing my rates then.