Fixed home loan change that could save you $4,055 after RBA interest rate warning

The Reserve Bank of Australia (RBA) is fast approaching the end of its interest rate-cutting cycle. That means it could be time to start thinking about whether it makes sense to fix your mortgage rate.

The central bank opted to keep the cash rate on hold at 3.60 per cent this week, with RBA governor Michele Bullock saying it was “possible” there could be no more rate cuts at all. With mounting speculation that the rate cutting cycle is done – and some market pundits even forecasting the next move as up – locking in a low rate now could be worth considering.

Mortgage broker Sam Neville told Yahoo Finance fixed rates hadn’t been on the radar for many borrowers lately given interest rates had been on the way down. But not any more.

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“If we’re settling in for a period of holds, then fixing your loan at a low rate can still match your goals,” the I Am Lending director said.

“Especially if you are going to have fluctuating income in the next year and you want to know that this is exactly what my repayment is and it won’t change.

“With most fixed loans, you can still make a certain amount of additional repayments during the year. So it’s not as rigid as sometimes people think.”

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Fixed rates aren’t currently very popular amongst borrowers, with both Commonwealth Bank and Westpac’s full-year results showing just 1 per cent of new loans taken out by borrowers were fixed.

So how do the numbers stack up? Canstar found the lowest 2-year fixed rate on its database was currently 4.74 per cent, while the lowest variable rate available to refinancers was 5.08 per cent.

“If there’s no more rate cuts for the remainder of this year and next, which is what CBA is currently suggesting, fixing doesn’t seem so crazy after all,” Canstar data insights director Sally Tindall said.

“Of course, with a highly data-dependent RBA, there’s no telling what could happen because it ultimately will depend on the data and what we’ve seen in the last few months is that it can track differently than what is expected.”

For an average owner-occupier with a $600,000 loan and 25 years remaining, Canstar found switching to the lowest 2-year fixed rate instead of the lowest variable could potentially deliver a saving of $4,055 in interest if rates stay on hold over the two years.

If there was one cut in February, fixing would still come out ahead and save you about $1,585 in interest.

But if there were two cuts, one in February and one in May, things would look different, and the variable loan would be ahead $504 after two years.

Canstar found 46 lenders on its database offered at least one fixed rate under 5 per cent, including major banks CBA and Westpac.

About 80 per cent of lenders’ lowest rate loans are fixed, not variable.

Here’s which lenders are currently offering the lowest fixed rates, according to Canstar:

• 1-year: SWS Bank with rates from 4.69 per cent

• 2-year: Australian Mutual Bank, Pacific Mortgage group with rates from 4.74 per cent

• 3-year: Australian Mutual Bank with rates from 4.74 per cent

• 4-year: Teachers Mutual Group, Freedom Lend with rates from 5.24 per cent

• 5-year: Australian Mutual Bank with rates from 5.19 per cent

If you don’t want to fully commit, a split loan between fixed and variable could be another option worth considering if it suits your situation.

“Then you can hedge your bets, have a bit of both worlds. You’ve got one lock that’s blocked in, so you know it’s not going to change,” Neville said.

“Then you can keep another section out, which means you still might get access to offset accounts, and you’ll still get the benefit of any fluctuating rates.”

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