Timing is everything

Fixed rates are plunging, but beware locking in too soon.

How soon and how far will rates fall? It’s once again the million-dollar question as banks spy rate cuts on the horizon and begin slashing fixed rates to lock in borrowers.

In January 2024, the average variable rate for new home loans was 6.3 per cent, according to the Reserve Bank, while cuts to fixed rates have seen some fall below 6 per cent*.

The catch, of course, is borrowers who fix too early risk missing out on further falls – and economists predict there are significant rate cuts to come (see table).

In recent months, fixed-rate loans have been about as popular as anchovy ice cream, accounting for less than 3 per cent of all home lending and refinancing in January 2024. That’s virtually nothing compared to a few years ago. In June 2021, approximately 45 per cent of home borrowing was on fixed rates as the RBA cash rate bottomed out at 0.1 per cent and Aussies raced to lock in record lows.

Now, as of April 2024, with rates at what’s roundly considered to be the peak of the cycle, it’s understandable no one’s really been rushing to fix. But in anticipation of the RBA entering an easing cycle, some lenders have started bumping up variable rates for new customers and cutting fixed rates.

Check the forecasts

While it’s impossible to pick the top and bottom of interest-rate cycles with certainty, looking at how experts expect things to play out provides a good gauge.

Economists from the big four banks (CommBank, Westpac Bank, NAB and ANZ Bank) have forecast RBA rate cuts of between 75 and 150 basis points (in normal speak that’s 0.75 to 1.5 per cent) over the period to June 2025.

CommBank has predicted the most aggressive cuts. With a rapidly cooling economy, they expect the RBA’s cash rate target to drop from 4.35 to 3.6 per cent by December 2024, falling further to 2.85 per cent by June 2025. If passed on in full – which is never a given – bank home loan rates could drop by 1.5 per cent from mid-6s to averages closer to 5 per cent.

Economists at ANZ Bank have been the most conservative, predicting the RBA will not cut rates until November 2024 at the earliest. Interestingly, of the big four banks, ANZ proved the most accurate at predicting RBA movements in 2023, according to analysis by the Australian Financial Review.

These forecasts can change as new economic data is released, but home buyers should factor them in when considering whether to jump to a fixed rate.

What to weigh up

Aside from economic forecasts, borrowers’ individual circumstances are also part of the equation. Some questions to consider include:

Are you likely to get a pay rise or lump sum that you may want to put on your mortgage? Many fixed rate home loans cannot be linked to offset accounts, so you’ll lose that ability to make additional repayments until the fixed term expires.
Can it work short term? Some lenders have already slashed fixed rates, while debate rages over whether official interest rate cuts are coming in September 2024 or at the end of the year. In the meantime, borrowers who jump on a lower, short-term fixed rate with a view to either fixing again or jumping back to a lower variable rate may be able to make savings.
Will rising property values offset higher rates? This should be a consideration for home buyers who may be keeping their powder dry waiting for rates to drop.
CoreLogic data from January 2024 showed home prices continue to rise, albeit at a more modest monthly rate of 0.4 per cent nationally.

Running calculations for multiple scenarios isn’t simple, so a broker is a good starting point to wargame different options. It can help to get ahead of the game so you can work out what numbers make sense and be ready to jump if any fixed rate offers line up.

Split the difference

A growing trend for homeowners looking to hedge their bets is a split loan, where a portion is fixed and a portion variable. How borrowers work the split is flexible.

Again, a broker can help run the numbers on how different options could work. Splitting a home loan allows borrowers the flexibility to make extra repayments and use offset accounts (against the variable portion) while taking advantage of potentially lower rates (on the fixed portion).

If you’d like to find out the latest fixed rates loans offers, get in touch now.