With interest rates at record lows there has never been a better time to get a good deal on a mortgage. Fixed rates have fallen to a record low of 3.33 per cent for one-year fixed, while three-year fixed rates are as low as 3.94 per cent, according to comparator website RateCity.

For most people, the mortgage is the biggest expense they will ever have.

Many people pay more in interest over the life of the mortgage than they pay for property itself. Even a reduction of one percentage point in interest on a $500,000 mortgage over a 30-year period could save the best part of $100,000 in interest payments to the lender.

That is a big pay-off from making the effort to get a discount on interest from your existing lender or shopping around for a better deal elsewhere. There is more than a 1 percentage point difference in interest rates between the best fixed-rate home loan and the best offer from a bank, says Taichi Hoshino, the chief executive of comparator website Monetise.

“Advertised big bank rates are so much higher because they rely on making money from lazier consumers who don’t argue or pay attention,” Hoshino says.

Some borrowers are in a better position to get a better deal from their lender than others.

Those with larger mortgages are in the best position to get a better deal, says Aaron Christie-David, the principal of Mortgage Choice at Alexandria in Sydney.

Bargain with lenders

He says those with a mortgage of more than $300,000, who have equity in their homes of more than 20 per cent and a good credit record are in the best position to haggle with their lender.

However, sometimes borrowers just find the whole process of looking for a better deal too difficult and too time-consuming, Christie-David says.

Having found a better deal, they may baulk at switching lenders because the borrower has so many financial products, such as savings accounts, credit cards and insurance with their current lender.

Christie-David says anyone with a large mortgage, good credit record and a loan-to-valuation ratio of less than 80 per cent should not be paying variable interest rate of more than about 4.3 per cent.

He says some of the best deals can be found outside of the big banks, such as the credit unions, building societies, mutuals and mutual banks.

Fixed rates fall

Some of the deals on fixed-interest mortgages are particularly sharp, says Peter Arnold, a financial analyst with RateCity.

For example, three-year fixed mortgage rates have fallen to as low as 3.94 per cent and there are a couple of variable rates below 4 per cent.

Arnold says one reason for the lower fixed rates is that the cost of funding for lenders has reduced.

Another is the expectation the Reserve Bank will cut the cash rate again if economic growth slows and inflation remains benign.

“With these factors combined, we’ve seen lenders able to get more aggressive in their marketing and offer these sharper deals,” Arnold says.

The standard variable rate is 4.83 per cent and switching to the lowest three-year fixed rate of 3.94 per cent would cut monthly payments on a $300,000 mortgage by more than $150, Arnold says.

Fixed versus variable

The choice for borrowers is not just one of either being entirely variable or entirely fixed.

Borrowers can always split their mortgage between variable and fixed. “You can have a foot in both camps,” Arnold says.

That way, the borrower is never more than half-wrong.

According to a survey of 33 experts by, almost two-thirds believe the Reserve Bank will cut the cash rate by the end of the year.

However, Michelle Hutchison,- a spokesperson for the comparison site, says borrowers should not be too concerned by a possible further cut in the cash rate. Rather, they should be prepared for an eventual rise in rates.

Most of the experts surveyed by – 56 per cent – are forecasting the cash rate will start rising in 2016.

The final quarter of 2016 was the most likely time, on average, that forecasters expect the cash rate to start to rise.

“It’s clear that interest rates will be on the way up, so borrowers need to make sure they are prepared by reviewing their budgets and working out if they can afford higher [interest] costs,” Hutchison says.

She says borrowers with a $300,000 mortgage should factor in a buffer of 2 to 3 percentage points, or an increase in repayments of at least $400 a month, to protect themselves when rates start rising.

Drawbacks of fixed

Generally, fixed-rate mortgages have fewer features than variable rate mortgages. For example, many borrowers like to take advantage of mortgage offset accounts. These are linked to the mortgage.

For the purpose of calculating the interest on the mortgage, the balance in the offset account is deducted from the mortgage balance, thereby reducing the interest costs on the mortgage.

However, not all fixed-rate mortgages have offset accounts. And when they have offset accounts, some credit an interest rate that is lower than the interest rate on the mortgage or credit only, say, 50 per cent of the interest.

Also, early repayment of a fixed-rate mortgage can incur costs for the lender, which are paid by the borrower.

There are no longer those long, nasty exit fees that some lenders charged borrowers who wanted to break the fixed-rate term early. They were banned on all mortgages – fixed and variable – taken out after the middle of 2011.

Lenders are allowed to charge break costs that reflect the true economic loss to the lender, if any, from repaying the mortgage early.

The upshot is that anyone taking a fixed-rate mortgage should do so with the intention of staying the course of the loan term. Which way next for interest rates?

As always, there is a diversity of opinion from economists on what the cash rate is likely to do.

Shane Oliver, chief economist at AMP Capital Investors, says there is a 50 per cent chance of the Reserve Bank cutting the cash rate before the end of this year.

He says the economy has not collapsed, despite the mining downturn. The labour market is a little bit stronger than many had assumed and non-mining sectors such as housing, retail, tourism and higher education have picked up.

On the other hand, while the Australian dollar has come down, which is also a positive, it is “still a bit too high”. And the investment outlook is quite poor and consumer confidence is sub-par, Dr Oliver says.

He thinks it most likely the Reserve Bank will sit on its hands during 2016, before possibly starting to increase rates in 2017.

CommSec economist Savanth Sebastian says the Reserve Bank will continue to maintain an “implicit easing bias” [lowering of rates] particularly given that inflation is likely to remain subdued over the coming year.

“Importantly, activity levels are lifting, driven by stronger home construction,” he says. “And, as a result, we expect the Reserve Bank to keep rates on hold over the rest of 2015,” he says.

David Bassanese, chief economist at BetaShares, says the Reserve Bank is not contemplating another interest rate soon. The bank could cut at its next meeting in early August if the Greek crisis worsens or the next inflation result is exceptionally low, he says.

“My base case at this stage, however, is that the bank is likely to remain on hold for at least a few more months, which may make it a stretch for the bank to cut twice by year-end, as my current forecasts imply,” Bassanese says.

As to the question of whether to fix the mortgage or stick with variable rates, Shane Oliver says, with fixed rates at historic lows there may be a case for fixing but there is no great urgency.

Fixed rates are only partially determined by the cash rate. If bond yields increase globally, fixed rates may rise, regardless of any changes in the cash rate, Dr Oliver says.

Home owners may want to lock in at least part of their mortgage at a low fixed rate, with the rest variable.

“Most people would not want to fix the whole of their mortgage,” he says.

That is because of relative inflexibility of fixed mortgages with restrictions on excess repayments and with break costs, should the fixed rate mortgage be repaid early.


  • Even a small reduction in the mortgage interest rate can save thousands of dollars in interest.
  • Those with large mortgages, substantial equity in their house and clean credit records are more likely to be able to get a better deal from their lender.
  • Fixed interest rates on mortgages are at historic lows; though most home-owners would probably not want to fix their entire mortgage.
  • Fixed-rate mortgages are relatively less flexible than variable-rate mortgages; most lenders allow their mortgages to be split between fixed and variable.
  • It may be some time off, but interest rates will increase. Borrowers should assure themselves that they will be able to make repayments, even if their mortgage interest rate increases by 3 percentage points.

Switched to better deal

Bradley Watts is young man with big plans for securing his financial future.

The 28-year-old shop-fitting project manager has refinanced his investment property in Queensland and his apartment in Parramatta in Sydney’s west.

He was living in the apartment but now he rents further out west, and the Parramatta apartment has become his second investment property.

Watts went to see a Mortgage Choice broker, who found him a better interest rate with a rival big bank. Bradley prefers to stick with the big banks.

He is already thinking about buying a third property and thinks a bank will have more flexibility when the time comes to take out a third mortgage.

Watts tried to get his existing bank to match the new interest rate and avoid the hassle of switching his everyday accounts and credit cards to the new lender, but the bank refused.

He decided to stick with variable interest rates, even though there are some good fixed-rate deals around.

“Our economy is facing more troubles now, with China and mining struggling, and I cannot see interest rates going up and [they] should be steady for the next two years, at least,” he says.

Posted by John Collett – Money Manager (Fairfax) on 22nd July, 2015