The RBA’s troubles lead to changes in fixed rate mortgages

Trying to pick where interest rates are going with any precision is fraught with danger but, generally speaking, fixing can be more attractive their interest rates are lower than variable rates. That is not yet the case: banks are offering similar pricing on variable-rate loans.

Moreover, the reason banks are cutting fixed rates is that markets believe variable-interest rates are close to a peak, after a rapid-fire 10 interest rate increases in the past year. Some economists think the RBA may be cutting interest rates a year from now.

Chief executive of mortgage broker Homeloanexperts, Alan Hemmings, says relatively few customers are fixing because of the risk that variable rates fall. Trying to “break” a fixed-rate loan before the term ends often leads to extra costs.

“The obvious drawback is the risk of missing out on rate cuts. The problem is if you fix, and rates reduce, you’re stuck with that higher rate,” Hemmings says.

So, it is unlikely there will be a dramatic surge in borrowers looking to lock in these rates for the next three years.


RateCity research director Sally Tindall points out the latest figures showed only 5 per cent of new lending is being done on fixed rates, and she doesn’t see a sudden turnaround in this trend. “Locking in a rate starting with a ‘5’ is a very different proposition to securing a rate that starts with a ‘1’ or a ‘2,’” Tindall says.

We probably won’t see home loan interest rates starting with a “2,” let alone a “1,” again any time soon: those were emergency settings for a once-in-a-century pandemic.

However, fixing could still appeal to people who want to lock in their repayments, perhaps because they would be financially stretched if rates were to rise even further.

Ultimately, fixed rates reflect the money market’s expectations of where official rates are heading, and this depends on the outlook for inflation and the economy.

AMP chief economist Shane Oliver says recent moves in the bond market reflect a view the RBA has probably done enough to control inflation, and this has driven the decline in fixed rates. However, he doesn’t expect further big changes in fixed rates unless inflation fades faster than thought.

“Until we get more evidence economic growth is really collapsing and inflation is falling away, it will most likely be a slow grind,” Oliver says.

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