Is fixing your home loan your best bet?

Lenders have started competing aggressively in the fixed home loan market by dropping rates, and it seems to be working. In June more than 3300 home loans were fixed, which was about 5 percent more than in May according to the Australian Bureau of Statistics.

It was the highest month-on-month increase since December last year, when borrowers were spooked by the large variable rate increases of November 2010. More significantly, the proportion of fixed home loans was almost double that of June last year.

One of the reasons for the push could be because the big banks are awash with deposits as Australians learn to save again, while many are still showing distaste for debt. So if you’re a prospective borrower with a good credit rating, expect institutions to pull out all the stops for your business.

Damian Smith, chief executive of RateCity, says we haven’t seen this level of fixed rate movement since the global financial crisis.

“The market is so slow that borrowers, whether fixed- or variable-rate, should be capable of getting much better deals than even the rates being advertised,” he says.

The proportion of fixed rate home loan applications through RateCity has increased significantly in recent months, up by 67 percent in August compared to July..

Is it wise to fix?

Commentators are urging borrowers to approach fixed rate mortgages with caution.

Namely, Carolyn Bond, co-chief executive officer of Consumer Action, who told the Sydney Morning Herald that her initial reaction to learning of the renewed interest in fixed rate mortgages was that people have short memories.

That’s because it was only a few years ago that some borrowers locked in at about 9 percent only to watch interest rates plummet during the GFC.

“The key message is that no one knows what’s going to happen with rates. But institutions probably have a better idea than we do and they’re going to try to make sure they don’t lose; it’s a bit of a gamble that you’re more likely to lose than win,” she warned.

Smith adds: “With the abolition of excessive early exit fees on variable rate loans, fixed loans have become more attractive for lenders. They can still charge break fees for early exit on these kinds of loans, and therefore they have confidence that fixed rates customers will be less likely to switch away to another lender”. 

For borrowers that are concerned about rate movements, Smith says split loans may be a good option to consider. But ultimately RateCity advocates taking out the lowest rate variable loan and ramping up monthly repayments.

“On average over the cycle the best strategy for most borrowers remains the lowest possible variable rate with the highest possible monthly repayments, but we appear to be in a window where fixing is definitely worth a close look,” he says.

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