Number your home loan rate should start with
With interest rates at record lows, mortgagees are asking themselves if it's time to switch from a variable to a fixed home loan, while prospective property buyers ponder which to choose.
The economic fallout from the COVID-19 pandemic prompted the Reserve Bank of Australia to slash the official cash rate twice in March and again earlier this month.
The cash rate now stands at 0.1 per cent - the lowest on record - and lenders have been swift to move in a bid to keep or gain customers.
But just five passed on a cut to their variable rate, with most banks so far opting to cut fixed rates instead.
According to financial product comparison service Canstar, 51 lenders are now offering rates - on both terms - below 2 per cent.
"This is a great time to have a decision like this on your plate," Canstar financial services group executive Steve Mickenbecker told NCA NewsWire.
RBA governor Philip Lowe has made it clear the cash rate will not rise until inflation is within the central bank's target range of 2 to 3 per cent.
Inflation is forecast to stay at 1 per cent for at least the next three years, so there's no rush to make a decision - although the next few years are a prime opportunity to hammer that property debt lower - Mr Mickenbecker says.
RateCity.com.au research director Sally Tindall said it was clear low rates were here to stay.
"Banks are putting record low fixed rates on the table in a bid to lock in existing customers for up to five years and recruit new ones to keep their loan books growing," Ms Tindall said.
"For people thinking about fixing, now certainly wouldn't be the silliest time.
"The cash rate is unlikely to go negative, and even if it did, there's no guarantee the banks would drop variable rates any further."
Mr Mickenbecker said some lenders could reduce their rates further, given strong funding lines available to them, but it wouldn't be dramatic.
"Fixing is all about saying 'at about 2 per cent even with the big guys, I can afford this comfortably and I'm happy to lock it in'. It's not about speculating this will be the bottom," Mr Mickenbecker said.
"Consider the drawbacks with each avenue."
The average variable rate is 3.35 per cent, while average rates on one- to five-year fixed-term home loans range from 2.4 per cent to 2.83 per cent.
The minimum rate on a standard variable mortgage is 1.99 per cent, while one-year fixed terms are as low as 1.89 per cent.
So it seems to many that a fixed rate is a no-brainer at the moment, with Commonwealth Bank now reporting about 40 per cent of new mortgages are fixed - way above the long-term average of 10-15 per cent.
But you need to consider what is best for you, considering all of the terms and conditions, not just the interest rate.
Most importantly, note variable loans have more flexibility compared with fixed.
"People wanting to use an offset account, make extra repayments towards their mortgage, or considering selling in the next few years might not want to fix their rate right now," Ms Tindall said.
"Anyone thinking of fixing needs to understand and accept the prickly terms and conditions that typically come with a fixed rate.
"There are often caps on extra repayments, limited or no access to an offset account, and costly break fees if you want to get out early."
She said the best rates from the big four banks were fixed for four years, which could be a long time to commit.
"One popular option is to split the loan so it's part variable and part fixed, which usually gives customers more flexibility when it comes to paying down debt."
Mr Mickenbecker said anyone worrying about losing their job should stick to variable.
"If you think there's a likelihood you may have to sell, don't fix," he said.
THINGS TO CONSIDER BEFORE FIXING
• Will I want to make extra repayments? Most banks have caps on how much extra you can repay while on a fixed rate
• Do I need an offset account? Most banks don't offer an offset account on their fixed rates
• Will I need to get out of the loan early? There can be hefty break fees if you do
• What is the revert rate? If you do fix, make a note of when the fixed term ends so you can negotiate a lower variable rate, refix or refinance. If you set and forget your fixed rate for the long term, it could end badly.
EXTRA REPAYMENTS - FIXED RATE CAPS FOR THE BIG FOUR BANKS
• Commonwealth Bank: up to $10,000 per year
• Westpac: up to $30,000 per fixed rate term
• National Australia Bank: up to $20,000 per fixed rate term
• ANZ: 5 per cent of the loan balance (calculated at the start of the fixed period) or $5000 per year, whichever is less.
Originally published as Number your home loan rate should start with