Interest rates risk emerges after key bank move

Fixed rates have been dropping.

Expected interest rate cuts later this month will give most homeowners reason to celebrate but the cuts could be food for thought for one group: those who have recently fixed their loans.

Homeowners and new property buyers have been urged to consider recent fixed rate offers by banks with caution given that there is a strong likelihood of variable rates dropping later this month.

Lenders are currently offering fixed rates as low as 4.99 per cent – well below the average variable rate of about 5.7 per cent for new borrowers.

ANZ has also joined in the cutting spree, dropping rates on some of its fixed rate products by 10-35 basis points this week.

ANZ now has the cheapest fixed rates of the big four at 5.19 per cent for two-year fixed terms.

RBA Governor Michele Bullock is expected to announce a rate cut this month or the next. Picture: Martin Ollman

Finder.com.au mortgage expert Richard Whitten said homeowners tempted to fix their rates should consider the reason banks were introducing these offers.

“A lower fixed rate loan is often a bet that variable rates will fall further, allowing the bank to lock in a better deal for itself in the medium term,” Mr Whitten said.

He added that lower fixed rates may be tempting for some.

“Most borrowers stick with variable rate loans. And these tend to be more competitive than fixed rate loans. But plenty of borrowers are waiting to lock in a low rate if the deals are good enough.

“There will always be some people willing to fix when rates drop. I think for some, 4.99 per cent looks pretty good right now.”

Banks’ fixed rate offers were a sign of which way they expected the cash rate to go when the Reserve Bank meets to discuss monetary policy next week Tuesday, Mr Whitten said.

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“Lenders set their fixed rates based on many factors, but anticipation of future variable rate drops (via cuts to the cash rate) is one of them. Lenders dropping their fixed rates now is a sign that they expect variable rates to fall even further.”

Mr Whitten said that borrowers who fixed their loans would effectively be paying more for “certainty”.

He explained that lenders introducing offers as low as 4.99 per cent may be banking on a 50 basis points drop in interest rates.

Were this to happen, a variable rate of 5.45 per cent would drop to 4.95 per cent, allowing the bank to get slightly ahead if the borrower fixed their rate at 4.99 per cent for several years, Mr Whitten said.

With fixed rate customers making up just 3 per cent of the customer base of some lenders, Mr Whitten added that there has been some reluctance from borrowers to take up fix rate offers so far.

A recent Finder survey indicated most mortgage holders who were open to fixing their loans would only do so if the rates dropped as low as 3.11 per cent.

But the temptation has been rising for some mortgage holders.

The research found 18 per cent mortgage holders are close to fixing – admitting they would consider fixing all or part of their mortgage when rates drop to 4–4.9 per cent.

One in four (26 per cent) would fix their mortgage when there’s a three in front (3–3.9 per cent), while 25 per cent would wait to fix until fixed rates drop to between 2 per cent and 2.9 per cent.

One in five (21 per cent) are holding out until the fixed rates are under 2 per cent.

Mr Whitten said with rates starting to fall, fixed loans are back on the radar for borrowers.

“A fixed rate at 3.11 per cent is the magic number for many Aussies – it’s the tipping point where borrowers feel confident to lock in their loans.

Finder’s Richard Whitten.

“Borrowers who fixed at the perfect moment when rates were at their lowest in 2020 managed to lock in historically low rates even as variable rates started rising.

“But it’s not about beating the banks. Fixing your rate is more about buying peace of mind and predictability in an increasingly expensive world.”

Canstar data insights director Sally Tindall said 13 different lenders were now offering at least one fixed rate under 5 per cent.

“If you’re looking to lock in your rate, don’t go aiming for one that starts with a 5 or a 6. You should be looking in the 4’s,” Ms Tindall said.

Bendigo Bank chief economist David Robertson said the RBA appeared “very likely” to cut rates next week to 3.6 per cent.

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