Fixed rate home loans are at their lowest, but they’ve got a problem

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Interest rates in Australia have hit new highs since the Reserve Bank’s monetary policy announcement on the day of the Melbourne Cup,

It took several weeks, but following a number of extraordinary RBA policy actions (including the formal passage of quantitative easing) at least one bank made the decision to offer a rate of three-year fixed mortgage of 1.89%.

It’s low. In fact, according to the interest rate comparison site, Mozo, this is the lowest commercial fixed interest rate (with an 80 percent loan-to-value ratio or LVR) the country has ever experienced. .

Fixed rates are dropping to historic lows because the banks are in desperate need of your money. So far, the evidence shows they get it.

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

But who really benefits from ultra-low fixed credit rates? The answer lies in finding a solution to the one big unresolved problem COVID-19 has produced: the lingering uncertainty for business.

The lowest fixed rates in history

This year, many aspects of business and finance have been turned upside down.

And this year, not only have fixed rates fallen below variable rates, the interest rate differential between them has never been greater, according to ANZ.

Provided

Based on ANZ Bank estimates, the average three-year fixed rate has almost halved over the past two years, from 4.1% at the end of 2018 to around 2.1% today.

Borrowers, especially first-time buyers, are taking advantage of this once-in-a-generation phenomenon.

West-central Sydney mortgage broker Bruce Carr said business fell shortly after the onset of the coronavirus pandemic, but in recent weeks, thanks to the Reserve Bank’s extraordinary policy measures, it picked up quite dramatically.

“Certainly there has been a much higher demand for fixed rate loans, and people tend to fix it for shorter periods,” he says.

It’s Carr’s job to keep tabs on interest rate movements and he says variable rates have barely budged in recent weeks.

“During the last two RBA cash rate cuts, the big banks in general haven’t cut their variable rates at all – there have been a few exceptions here and there – but they have cut their fixed rates sharply. “

Two forces are at play here.

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

And second, the banks are afraid.

They fear losing customers as the economy struggles to gain traction, and they fear losing customers to their competitors.

For banks, in these very uncertain economic times, customer loyalty has been a priority.

“I would say I haven’t really seen something like this [in my 22-year career]”says Bruce Carr.

How did we get here?

The spot rate has traditionally been viewed as the benchmark rate that influences many different interest rates, including loan products from 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 between rising lending rates, the other shows how fixed rate loans represent a higher percentage of the
The share of new loans with fixed interest rates has skyrocketed.

When the Reserve Bank lowered its spot rate target to 0.10% on the day of the Melbourne Cup, money markets moved quickly.

The rate has since rebounded between 0.04% and 0.05%. Still so close to zero.

Meanwhile, in the background, the Reserve Bank has done its best to lower interest rates “along the curve”, that is, by trying to lower interest rates. short and long term (which affect variable and fixed rate loans respectively). ).

It is also stated that it will not consider increasing the cash rate target until it sees a marked improvement in the unemployment rate – which is expected to be in at least three years.

This political environment has convinced banks that they can comfortably reduce interest rates on their fixed rate loan products.

The real estate market should take off

As you might expect, the demand for fixed rate loans is spilling over into the real estate market.

As ANZ’s Housing: A Strong Report from 2021 notes, “The housing industry is turning a corner.”

“After falling since April, national house prices remained stable in October and are expected to rise over the next few months.

“We now expect house prices nationally to increase slightly over the remainder of this year.

“Next year, we expect price gains of around 9 percent in capital cities.”

Buyer beware

When you do a deal with a big bank, make no mistake, they expect to benefit.

You, on the other hand, maybe not.

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

If you lose your job, sell your home, or face major unexpected expenses, a fixed rate loan can turn into a nightmare.

If you need to terminate the contract, you will be charged a termination fee based on how much you owe and how long the fixed term remains.

The Australian Securities and Investments Commission’s Moneysmart website notes that “breakage fees can be very high.”

“In general, the more interest rates have fallen since you took out the fixed rate loan, the higher the break-up costs will be. “

Banks want to lock you up as a customer for as long as they can, and this creates extraordinary opportunities for borrowers, but don’t be fooled into thinking you can’t lose.

As Bruce Carr puts it, “in times of economic volatility, it doesn’t always make sense to lock things in.”


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