It is usually never a good idea to bet against our big banks, except maybe when it comes to fixing your mortgage.
Researcher Canstar, which has analysed home-lending data going back 20 years, has found that in half the cases where a borrower takes a fixed-rate mortgage, the borrower has paid the lender less in interest than if they had taken a variable interest-rate mortgage.
The results overturn conventional wisdom, which says most borrowers who opt for fixed rate mortgages lose out to lenders.
It is surprising that the banks, with all their resources, get the calls on their fixed rate mortgages right only half the time. Perhaps it shows how hard it is to correctly forecast interest rates.
But for lenders’ pricing of their loans it is not all about future interest rates. There is the cost of their finance and their competitive positioning with respect to other lenders.
They also know that fixed-rate borrowers are sticky. Borrowers face a “break” cost that covers the lenders’ losses if interest rates fall in the meantime and the money can be re-lent only at a lower interest rate.
Canstar’s research finds the biggest winners over the past 20 years have been those borrowers who took a three-year fixed mortgage in November 2005. At the start of the period the cash rate was 5.5 per cent.
It increased to 5.75 in early May 2006 and steadily rose from there to reach a peak of 7.25 per cent in early March 2008, where it stayed until early September that year.
Canstar estimates these fixed rate borrowers with a $300,000 interest-only mortgage were ahead by about $15,000 over the three years compared with borrowers who have variable rate mortgages.
With the cash rate at a 50-year low and some very good fixed-rate deals on offer, interest in fixed-rate mortgages is running high. Canstar says more than 50 per cent of searches on its database of mortgage are for a fixed-rate mortgages compared to the more usual 30 per cent.
So how good are the fixed-rate deals? Justine Davies, finance editor at Canstar, says the big banks’ standard variable, or advertised rate of interest is about 6 per cent.
She says the advertised rates of smaller lenders are often lower. However, borrowers with a loan of at least $250,000 should be able to get a discount on the advertised rate. She says the major banks’ average interest rate on a three-year fixed-rate loan is about 5 per cent.
Borrowers should be at least considering whether a fixed rate is right for them. After all, it is not like the cash rate is at normal levels.
The cash rate will have to return to normal levels eventually; though, some market watchers are forecasting that rates will fall further next year, perhaps by one percentage point. That perhaps means there is no hurry to fix.