As all eyes look to the Reserve Bank meeting on Tuesday, expectations that the RBA will cut are very, very high. In a speech by RBA governor Glenn Stevens on Tuesday, the bank ”kept the door firmly ajar for a rate cut next week”, according to Commonwealth Bank economist Gareth Aird.
”We think the RBA will cut the cash rate to 2.5 per cent at next week’s meeting,” he said in a research piece.
The market backs up his opinion. The Credit Suisse Implied Monetary Policy Rate Indices had the probability of a rate cut at the RBA’s next meeting shift from 79 per cent to 92 per cent immediately after the governor’s speech.
And in further indications of an expected cut, banks and mortgage providers have been spending the last week aggressively cutting fixed-rate mortgages.
According to Kirsty Lamont, marketing director at comparison website mozo.com.au, there is some very fierce competition in the one-year fixed-rate space under the 5 per cent mark.
In another indication that the next move for rates is pretty assuredly down, rates on fixed-term deposits, particularly short terms of 12 months or so, continue to fall.
So with fixed rates so obviously low, is now a good time to fix your home loan? Personally, I’ve always wondered at the cleverness of betting against the banks, which is, in effect, what you do when you take out a fixed loan.
What do I mean? Well, banks are profit-making institutions, they are not going to fix their rate so low that they can’t make money themselves, and they have teams of boffins working around the clock to provide a rate that appears competitive enough to you, but which will still provide them with a profit. I think I’m reasonably savvy when it comes to financial matters, but I’m definitely not as smart as the bunch of actuaries who are toiling away for the banks, so most of the time I choose not to bet against them.
The other thing about fixed rates – and they are very competitive at the moment with one-year fixed rates as low as 4.39 per cent (Greater Building Society Ultimate Home Loan Package) and five-year rates just a touch over 5 per cent at 5.16 per cent (UHomeLoan; refinance only) – is that they can be inflexible when it comes to making extra repayments or paying off your loan early. And that is something that more and more of us are striving to do. Some fixed loans don’t allow payments without a fee, and the longer the term of your fixed loan the more likely you will have some restrictions around extra repayments. There are a few flexible products on the market at the moment, according to Lamont, such as those from Greater Building Society (which has no limits) and Newcastle Permanent (which allows up to $25,000 a year).
”I think it always comes down to your individual situation,” Lamont says. ”Fixed loans aren’t as flexible in terms of paying off extra and paying off your loan early.” But one option well worth considering is fixing a portion of your loan.
”That’s a really great way to get a good rate,” Lamont says. ”It is definitely a great time to consider fixed at least as part of your home loan.” Lamont also cautions against what she likes to call the ”fixed-rate revert rort”.
Some mortgages might look very attractive with their low fixed rate for the early years, but then the variable rate they revert to after that is much higher than other rates. The key is looking at the comparison rate. This is the rate standard that was introduced a decade ago to include fees and charges and provide a better tool for comparing loan products.
So to fix or not to fix? It depends on your individual situation – but if you’ve done your homework, fixing part of your mortgage is probably not a silly strategy right now.