Borrowers better off with two-year fixed-rate even if cash rate falls to 2.5%: RateCity

Borrowers who choose to fix their home loan for two years at 4.99% would still be $1,500 better off if variable rates fell by 0.5 percentage points over this period, according to a new study by financial comparison website RateCity.com.au.

It found that the cash rate would need to fall by a cumulative 1oo basis points (four rate cuts of 25 basis points each) over this period to a record low of 2% and be passed on in full by lenders for variable borrowers to come out better off.

The study was based on the average of the major four banks’ lowest advertised two-year fixed-rates of 4.99% compared to their lowest advertised variable rates of 5.67%, for a $300,000 home loan with a 30-year loan term.

Borrowers could potentially save even more if they were to fix with AMP, which is offering the lowest two-year fixed-rate on RateCity’s database of 4.84%.

However, they should consider all the aspects of any fixed-rate home loan offer beyond just the rate (including fees, the ability to make extra repayments without penalty and other conditions) before deciding on which loan is right for them.

They could also consider splitting their loan between fixed and variable to have a degree of certainty about home loan repayments and also benefit from any variable rate cuts or access other variable rate home loan benefits such as an off-set account or the ability to make additional repayments without penalty.

The likelihood of further rate cuts is being discounted by lenders with the Commonwealth Bank now not expecting any more rate cuts this year and Business Spectator columnist and economist Stephen Koukoulas writing yesterday that the better-than-expected unemployment data meant interest rates were likely to be locked in for a few months at the minimum.

Official ABS figures shows the proportion of borrowers who are choosing to fix their home loan is trending up with 13.1% of dwellings financed with fixed-rate home loans over the past six months to January compared with 12.2% in the previous six months.

February figures from Mortgage Choice (a month ahead of the ABS) recorded an increase in fixed-rate demand to 18% of all home loans with nearly one-in-four Queenslanders opting for a fixed-rate home loan compared with just 11% of Victorians.

Alex Parsons, RateCity’s CEO, said the findings revealed why so many borrowers are currently choosing to fix their home loan.

“It’s unusual to see so many fixed home loans offering cheaper rates than variable.

In fact, out of more than 100 lenders in RateCity’s database, 21 lenders are now offering two-year fixed-rate home loans under 5% – including all four major banks.

Compared to variable, only one lender is currently offering a home loan under 5% – State Custodians at 4.99%.

This loan does require a hefty 25% deposit and is only available for borrower who are refinancing.

“We discovered that it would take at least three 25 basis point cuts within the first six months or four 25 basis point cuts within the first 12 months for borrowers to be better off with a variable rate,” says Parsons.

“Of course this is off the assumption that any RBA changes are passed on in full immediately which has not recently been the case.

“Borrowers need to remember there are several factors that can impact how much you can save or lose by fixing your home loan such as timing of when rate cuts occur, if lenders pass on the full cuts and if you’ve locked in a good value deal. So to make the most of the home loan market, make sure you use RateCity to compare what lenders are offering and save.”