Finance

Are fixed rates too good to be true?

By Nell Matzen  |  27 May, 2021

Banks are currently offering historically competitive fixed interest loans, some of which are below 2%.

The rise of variable rates and shrinking fixed rates is due to the RBA’s bond-buying program and recent rate cuts.

Experts say that the record low fixed rates are a once in a lifetime opportunity that could help whittle down mortgage debt.

Speaking with Domain.com.au Property Planning Australia managing director David Johnson said, “I’ve never seen a better time where it makes more sense to fix a large chunk of your debt than right now”.

“We may never see fixed rates this low again”, he said.


How have low fixed rates encouraged people to commit to a home loan?

According to Research Director at Ratecity.com.au Sally Tindall, the move is intended to encourage would-be homeowners to enter the booming property market.

Speaking to the Sydney Morning Herald, Canstar Chief Executive Steve Mickenbecker said the historically low fixed rates are encouraging people to commit to a home loan, locking in savings and repayments.


Who is eligible for the record low fixed interest rate loans?


Not everyone is eligible for the low rates being offered on fixed-rate home loans.

Westpac commenced one of the most competitive fixed rates on the market in early March 2021, but only for a particular customer.

Talking to Nine News, Miss Tindall said that the Westpac Group, in particular, is reserving these loans for customers looking to refinance who own more than 30% of their home.

“If you’ve had your home loan for a few years, you might find you have more equity than you think and qualify for one of these low-rate loans”, she said.


What are the benefits of a fixed-rate loan?


The main benefit of locking into a fixed rate is stability.

According to Yourmortgage.com.au, depending on your current interest rate and lender, taking advantage of the record low-interest rates could potentially lower your repayments.

Fixing your rate in times of financial uncertainty, such as a global pandemic, would potentially allow you to maintain your low-interest rate if the RBA were to raise rates in the near future.

However historically low a fixed rate is, there are some potential backs of a fixed-rate loan.

What are some of the drawbacks?

Fixed-rate loans have some potential long and short-term disadvantages.

According to David Johnston, fixed-rate loans don’t offer the same repayment flexibility variable rates do.

“A lot of fixed-rate loans don’t have an offset, and a lot of them don’t have redraw,” he said.

“If you inherit $50,000, you might not be able to reduce your loan by that much,” he said.

To overcome this drawback, Mr Johnston suggests fixing just a portion of your home loan and leaving the rest variable, which will allow for changes in financial circumstances and extra repayments.

What will happen if fixed rates go down further?

There is a possibility that current rates will fall even further, and according to Mr Johnston, this could create risks for mortgage-holders.

“If the economy doesn’t recover and actually gets worse, and we have to go more into quantitative easing and negative rates, if you need to sell or refinance, there are exit costs,” he said.

“If funding costs fall during the fixed term, break costs can be significant. The more interest rates fall, the higher break costs will be,” he said.

Fortunately for fixed-rate mortgage holders, rates are not expected to fall much further.

What are the big 4 banks recommending for customers?



Following the trend set by Westpac, all of the Big 4 banks, bar ANZ, are offering fixed rates under 2% – although ANZ’s lowest fixed rate is only slightly above 2%.

According to the rate cute announcement from NAB, the big banks are encouraging both new and existing customers to take advantage of their current fixed rates, with existing eligible customers being told to expect a quick change to the new fixed rates.

NAB Executive Home Ownership Andy Kerry said, “NAB customers on a variable rate can quickly and easily switch to a fixed rate in our app, with hundreds of our customers taking this option every week.”

The Big 4 are also streamlining and reducing their loan processing times to support the mortgage boom spurred by the record-low interest rates.

What are non-major lenders currently offering?


Australia’s non-major lenders are coming to the table, offering fixed rates to compete with the major lenders.

Bank of Queensland, Macquarie Bank and Suncorp are all offering rates hovering around and below 2%.

Talking to Savings.com.au, AFG Chief Executive David Bailey said that borrowers are flocking to non-major lenders.

“The major lenders’ market share dropped from 66.8% at the end of the 2020 financial year, the highest level since 2017, down to 58.9% at the close of Q1,” he said.

Words by Nell Matzen

Sources

Westpac offers lowest two-year fixed rate home loan on the market

Advantages and disadvantages to a fixed rate

You may never get a better deal on fixed-rate mortgages

Fixed mortgage rates are at record lows, so is it time to consider fixing your home loan? We asked the experts

NAB lowers fixed home loan rates

Get in touch if you are looking to apply for the scheme or if you’re unsure about your eligibility. Our home loan professionals can help you understand your options if you think a renovation could be in your future. 

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