Fixed rate home loans are lower than ever – but they have a catch


Australian rates have hit new lows since the Reserve Bank’s monetary policy announcement on Melbourne Cup Day.

It took several weeks, but after a series of extraordinary policies by the RBA (including a formal adoption of quantitative easing), at least one bank made the decision to offer a three-year fixed home loan rate of 1.89 percent.

That is low. In fact, according to the Mozo interest rate comparison site, this is the lowest commercial fixed rate (with a loan to value ratio, or LVR of 80 percent) the country has ever seen.

Fixed rates are dropping to an all-time low as banks desperately seek your money. So far, the evidence shows they’re getting it.

The ANZ-Bank reports that borrowers are “rallying” to take out a fixed-rate loan.

But who really benefits from ultra-low fixed interest rates? The answer lies in finding a solution to the big unsolved problem that COVID-19 has brought with it: the ongoing uncertainty for businesses.

Lowest fixed prices in history

This year, many aspects of the economy and finance have turned upside down.

And this year, not only have the fixed interest rates fallen below the variable ones, but the interest rate difference between them has never been so great, according to ANZ.


According to estimates by ANZ Bank, the average three-year fixed interest rate has almost halved in the last two years from 4.1 percent at the end of 2018 to around 2.1 percent today.

Borrowers, especially first-time home buyers, take advantage of this unique phenomenon.

Inner West Sydney mortgage broker Bruce Carr says business slumped shortly after the coronavirus pandemic broke out, but it has grown quite dramatically in recent weeks thanks to the Reserve Bank’s exceptional policies.

“In any case, there is a much higher demand for fixed-rate loans, and people tend to work for shorter periods of time,” he says.

It’s up to Carr to keep a close eye on interest rate movements, and he says floating rates have barely moved in the past few weeks.

“With the RBA’s last two cut cuts, the big banks generally didn’t cut their floating rates at all – there were a few exceptions here and there – but they cut their fixed rates sharply.”

There are two forces at play here.

First, the Reserve Bank uses its political firepower to lower the cost of borrowing for the banks, which means they can offer cheaper products.

Second, the banks are scared.

They are afraid of losing customers as the economy struggles to gain ground and they are afraid of losing business to their competitors.

In these economically extremely uncertain times, customer loyalty is a priority for banks.

“I would say I’ve never seen anything like it [in my 22-year career]”Says Bruce Carr.

How did we get here?

The cash rate has traditionally been viewed as a reference rate that influences many different interest rates, including credit products with the major banks.

The Reserve Bank sets the cash rate target, not the actual cash rate. It is determined by the money market.

Two graphs - one shows the difference in the rising interest rates, the other shows that fixed rate loans account for a larger proportion of the interest
The share of new fixed-rate loans has skyrocketed.

When the Reserve Bank lowered its cash rate target to 0.10 percent on Melbourne Cup Day, money markets moved quickly.

Since then, the rate has fluctuated between 0.04 and 0.05 percent. Very close to zero.

Meanwhile, behind the scenes, the Reserve Bank has been doing its best to cut rates “along the curve” – ​​that is, it is trying to cut both short-term and long-term rates (which affect both floating and fixed rate loans).

It is also noted that the idea of ​​raising the cash rate target will not be considered until a large improvement in the unemployment rate is seen – which is believed to be at least three years away.

This political environment has convinced the banks that they can conveniently lower the interest rates on their fixed-loan products.

Real estate market is expected to rise

As expected, the demand for fixed-rate loans is penetrating the real estate market.

As ANZ’s Housing: A Strong Report for 2021 states, “the housing sector is turning a corner”.

“After falling since April, national house prices remained unchanged in October and are likely to rise in the coming months.

“We now expect house prices at the national level to rise slightly compared to this year’s balance.

“Next year we expect exchange rate gains of around 9 per euro in the capital cities.”

Buyers beware

When you sign a contract with a major bank, make no mistake, it expects to benefit from it.

You, however, are not allowed to.

A lot can happen in three years. The bush fires and the coronavirus have shown that a lot can happen in just three months.

When you lose your job, sell your home, or have significant ongoing unexpected expenses, a fixed rate loan can become a nightmare.

If you have to terminate the contract, you will be charged a break fee, which is based on the amount of your debt and the remaining term of the fixed term.

The Australian Securities and Investments Commission’s Moneysmart website states that “the interruption fee can be very high”.

“In general, the more interest rates have decreased since you took out the fixed rate loan, the higher the default fee.”

Banks now want to retain you as a customer for as long as possible, and that opens up some extraordinary opportunities for borrowers, but don’t be fooled that you cannot lose.

Bruce Carr says, “In times of economic volatility, it doesn’t always make sense to lock things up.”


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