As the major banks cut their fixed interest home loan rates this week 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 our blog page as I have done.
“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,” Finder.com.au 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.
“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.
“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.”