Interest rates are tipped to hit a record-low by winter - and analysts say this makes fixed-rate home loans a good idea again. The popularity of fixed-rate loans collapsed to a record-low last year as the Reserve Bank of Australia (RBA) slashed rates aggressively. This left some families paying interest rates of more than nine per cent while others on variable rates saw their mortgages drop. But fixed mortgages are now seen as possible insurance against a surprise rise in rates. With interest rates on home loans now also at four-decade lows, fixed-rate borrowing is starting to look like a good option again.
A senior analyst with financial products researcher Canstar Cannex, Harry Senlitonga, said there was no guarantee interest rates would not rise again unexpectedly, which made fixed-rate mortgages a compelling choice. “It’s a big question mark with interest rates: in three years anything can happen,” Mr Senlitonga said.
Macquarie Group interest rates strategist Rory Robertson said interest rates were likely to hit two per cent. But he thinks this will happen later in the year rather than by mid-year because he believes the RBA will cut rates by smaller margins than it has recently. Debt futures markets see interest rates falling to three per cent by March, which would be the lowest cash rate since early 1960.
With fixed-rate loans now holding a record-low share of the mortgage market, lenders are offering cheaper mortgage rates to entice borrowers away from the lowest standard variable mortgage rates since the 1960s. St George is offering a fixed-rate mortgage rate of 5.64 per cent, set for three years.
The rate is only marginally lower than the 5.74 per cent standard variable rate offered by NAB and the Commonwealth Bank. But the fixed-rate mortgage would be attractive if rates rose again in the next three years, and drove up standard variable rates. Just 2.5 per cent of new borrowers chose a fixed-rate home loan, set for two years or longer, in November, Australian Bureau of Statistics data shows.
Months earlier, between March and August, more than 43,000 unlucky borrowers locked themselves into fixed rate home loans, charging more than nine per cent interest, because they thought rates would keep rising as inflation soared.
Mr Robertson said future rate cuts from the RBA were likely to be smaller than the 100 basis point margins delivered in February, December and October, on top of smaller cuts in between. “The future moves will be smaller and will be delivered more than one meeting apart,” he said. The latest rate cut on Tuesday took the cash rate to a 45-year low of 3.25 per cent, and standard variable home loan rates below six per cent for the first time since the 1960s.
