When to fix a home loan

Sophie Elsworth looks at whether staying on a variable rate is worth it

TO FIX or not to fix? Home loan rates are continuing to tumble, putting borrowers in the box seat to slash their debt at a quicker pace than ever before.

It’s been a triple treat for mortgage customers this year as they lapped up three cash rate cuts in June, September and October.

Experts are predicting there are possibly another one or two more cuts to come.

This means borrowers need to carefully weigh up if it’s time to bite the bullet and lock in their home loan rate.

1 BEST INTEREST RATES

There’s only a small gap between the cheapest variable and fixed rate loan deals. Many lenders are offering rates under the 3 per cent mark on both loan options.

Data from financial comparison website RateCity found, for owner-occupier principal and interest loans, the cheapest three-year fixed rate was offered by Reduce Home Loans at just 2.69 per cent. Reduce also had the lowest variable rate deal at just 2.74 per cent. RateCity spokeswoman Sally Tindall said, before making any decision, “find out what rates are available for both” types of loans.

And with the RBA cash rate sitting at just 0.75 per cent, there remains only room for three more cash rate cuts before hitting zero.

“The floor is in sight,” Ms Tindall. “Before fixing, think about how much further fixed rates might fall to get to the bottom of the cycle.”

RateCity’s data found, when comparing variable and fixed loans, on average fixed rates were just 0.19 per cent lower.

2 PASSING ON CUTS

Regardless of whether or not there are more cash rate cuts to come, the question remains whether the banks would pass on more cuts to their borrowers.

The big four banks have remained under intense scrutiny for failing to pass on the cuts in full. The National Australia Bank, Westpac, Commonwealth Bank and ANZ only passed on between 0.55 and 0.59 percentage points of the 0.75 per cent of cuts this year, frustrating many borrowers.

RateCity predicts if there is another cut the banks will only pass on an estimated 0.14 percentage point drop to loan deals and, if there are two rate cuts, they will only pass on a 0.28 percentage point discount.

3 WHAT BORROWERS ARE DOING

Latest data from the Australian Bureau of Statistics found of all new owneroccupier mortgages in August this year, only 11.9 per cent of borrowers locked in their mortgage rate.

Compare this with the Global Financial Crisis: in August 2008 a massive 25.5 per cent of borrowers locked in loan rates. Online mortgage broker Uno Home Loans’ chief executive officer, Anthony Justice, said its data showed in September this year only 9 per cent of borrowers opted for fixed-rate loans compared with 13 per cent in September 2018.

“When you do get to the bottom, fixed is pretty good because when rates start going up you are already locked in,” he said.

“We would always say for people, if they want certainty with what their repayments will be over the one, two, three, four or five-year period, then fixed is definitely worth considering.”

RateCity found people who fixed three years ago would now be better off. If a borrower locked in a $300,000 30-year loan at the average rate of 4.02 per cent they would have paid about $35,240 in interest charges.

This compares to staying on the average variable loan, where they would have paid $39,770 in interest charges.

They would have saved themselves $4530 in interest charges.

4 SPLITTING A LOAN

For those wanting to hedge their bets, having a portion fixed and a portion variable could be the best way to go.

HSBC head of distribution Alice Del Vecchio said it had “a lot of customers who choose to do a bit of a combination”.

“Nobody is very good at determining rate movements so it gives you the best of both worlds,” she said.

“You can fix a portion and have certainty and security over exactly what the repayment is for a portion, but if you do think rates will move downwards you’ve got a variable component that allows you to put in a lot more money if you wanted and redraw out as needed.” Customers could split any portion of their loan, for example, going

50-50 or perhaps opting for 70 per cent fixed and 30 per cent variable.

5 RESTRICTIONS

Fixed rate loans give borrowers plenty of certainty but they do come with restraints.

This includes limiting how much extra a customer can repay on their loan during the locked period.

Hefty break fees do apply if the borrower decides to exit the loan before the end date, so for those looking to sell their property or refinance their loan, experts say it’s best to steer clear of fixing.

Ms Del Vecchio said customers needed to find out exactly what restrictions applied to the loan they were looking to take out. “Different lenders have different features and different products – you have to be well aware of what’s involved,” Ms Del Vecchio said.

“Just because it’s fixed it doesn’t mean it’s not flexible.

“You’ve got to look in the detail and really compare products.”

Fixed rate loans often don’t come with mortgage offset accounts, which are products that allow customers to reduce their overall interest charges by keeping cash in their day-today account linked to their mortgage.