Think before locking in

Borrowers who choose wisely can reap the rewards of tumbling interest rates, writes Sophie Elsworth

ROCK-bottom mortgage interest rates remain on the horizon for some time yet, leaving many borrowers with no need to fix their loans.

Some financial institutions are offering deals where variable mortgage rates are cheaper than fixed rates, so customers are better off if they do not lock in.

The Reserve Bank of Australia kept the official cash rate on hold last week at 1 per cent, and RBA governor Philip Lowe recently said it was reasonable for borrowers to expect an “extended period of low interest rates”.

Consumers are not alone if they are scratching their heads trying to work out if they should commit to a fixed-rate term.

For three-year fixed-rate deals – the most popular lockedin term – the cheapest offers sit at just 2.94 per cent, research group Canstar’s figures show.

But customers can snare slightly cheaper rate offers if they opt for a variable loan – the lowest deal is 2.89 per cent.

Aussie Home Loans chief customer officer David Smith said borrowers needed to think twice before locking in their rate while more rate falls remained on the horizon.

“There is a strong prospect that the cash rate will fall a third time this year, which should result in lower variable and fixed mortgage rates,” he said.

“So it would seem like now is a good time to watch both fixed and variable rates very closely and see how the Reserve Bank acts in the months ahead.”

He urged borrowers to use a mortgage broker to help them check their deals and ensure they were not paying too much.

Latest Australian Bureau of Statistics data showed that for owner-occupier loans – both new and refinanced loans – in June this year, 14.1 per cent of customers fixed, compared to 17.5 per cent in June 2017. Financial adviser Scott Haywood said he was not dead against fixing a loan right now, but this ultimately meant you were trying to outsmart your lender.

“If you are pestering your bank and they are not moving on your variable rate there is certainly an argument you could fix,” he said. “Don’t think you are smarter than the bank. They have teams of economists who are doing algorithms on everything and they will still make money whether you go for fixed or variable loans.”

Mr Haywood said locking in a loan term meant you would have certainty about your repayments and would not have to deal with potential rate rises.

Realestate.com.au chief economist Nerida Conisbee said “worst case” there would be two more cash rate cuts in the next 12 months. “Mortgages will get cheaper,” she said.