The Reserve Bank of Australia might have only started lifting the cash rate in May after a decade-long cycle that saw official interest rates drop to 0.10% – their lowest point in history. But, since then, the central bank has hit homeowners with five consecutive rate rises – with the latest 0.50-percentage-point hike in September taking the cash rate to 2.35%.
And with many lenders passing on the hikes in full to their variable rate customers, that latest increase means borrowers with a $500,000 mortgage over 30 years are now paying $652 more per month on their home loan repayments than in April, according to Canstar’s calculations.
However, help may be on its way from a very unexpected direction.
That’s because, over recent weeks, several lenders have started quietly cutting some of their fixed rates including Westpac, Commonwealth Bank, Macquarie Bank and Suncorp.
For example, CBA, Australia’s largest lender, slashed its four-year owner-occupied fixed interest rate by 1.60 percentage points to 4.99%.
What’s going on?
Some economists are predicting rate cuts
Unfortunately, September’s increase in the cash rate is unlikely to be the last, with Phillip Lowe, the RBA governor, saying in a recent statement the central bank is “committed to returning inflation to the 2-3 per cent range over time”.
Lifting the cash rate target is the central bank’s main tool for doing this. However, the RBA has to walk a very fine line between tempering inflation and slowing down economic activity too much. In other words, the RBA is aiming for a ‘neutral’ cash rate when the economy is said to be in equilibrium.
No one knows exactly what level this neutral cash sits, though the RBA has previously assessed it as being “at least 2.50%”, according to Westpac.
However, some experts think the RBA will overshoot the neutral rate with its aggressive tightening cycle and, as result, will be forced to ease back and cut rates again by as early as next year.
CBA is the most optimistic, with the bank’s economists forecasting the RBA to cut the cash rate starting in late 2023. Westpac and ANZ have both pencilled in cash rate cuts by mid-2024.
Now that lenders are increasingly expecting lower rates in the future, they’ve started pricing in these reductions in the form of cheaper fixed-rate loans.
This, naturally, begs the question: should you fix your home loan or remain on a variable rate?
The pros and cons of fixing your home loan
With a fixed-rate home loan, you can lock in an interest rate for a set timeframe – typically between one and five years.
The advantage of doing this is that you’ll be protected should interest rates subsequently rise. This also makes it easier to budget as your repayments won’t change.
On the other hand, you won’t benefit should your lender cut its home loan rates during your fixed period.
Fixed-rate home loans can also be inflexible, with many lacking features such as offset accounts and redraw facilities that can save you money in the long term. You will also:
On top of this, remember, no one knows for sure how many more RBA rate rises lie ahead. So while fixing now could help you in the short term, it might end up costing you more over the next few years should the RBA start cutting rates again.
Should you fix your home loan?
Every borrower is different, so there isn’t one answer. What’s right for someone else won’t be right for you.
That’s why it’s a good idea to speak to an expert broker like Shore Financial, who can help you weigh up the pros and cons depending on your individual financial circumstances.
Looking to save money on your home loan? Shore Financial can help. To discuss your options, you can call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.
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