Why I blocked my home loan at 1.84 percent for two years
The tide is turning in the home loan fixed rate market and it is time to get moving if you too want a “1” up front. But there is no need to panic either – interest rates will generally remain low for a while, for reasons I will explain later.
Recent moves in the new mortgage market were summed up this week in a speech by the Reserve Bank’s Deputy Governor Christopher Kent.
Most notably, Kent confirmed that our central bank was ready to shut down a special funding facility it put in place at the start of COVID-19 to provide cheap funding for banks.
The so-called “Term Funding Facility” enabled banks to borrow a total of $ 200 billion for three years at the ultra-low interest rate of 0.1 percent. Banks and other lenders are busy exhausting the funds available under the program before it expires on June 30th.
There has been some speculation that the end of the facility will cause banks to revise their fixed interest rates for new borrowers.
But Kent says there is no need to panic.
In reality, the TFF was just one of the reserve’s measures to keep lending rates down. Others include keeping the official cash rate close to zero, explicit “forward guidance” for markets that do not raise that cash rate before 2024, its government bond purchase program, and the explicit target of three-year interest rates Government bonds at 0.1 percent.
“Combined, these measures have resulted in interest rates across the economy being lower than they would otherwise have been,” says Kent.
Yes, it is true that four year fixed rates with a “1” have gone away in the past few months.
But that, according to Kent, is more due to a global reassessment of the inflation outlook in the financial markets, not the end of the TFF. And anyway: “Fixed-rate loans with these longer terms only make up a small part of total lending”.
Aussies fell in love with fixed rates thanks to ultra-cheap deals during COVID. About 30 percent of all outstanding Australian home loans now have fixed terms, up from just 20 percent a year ago.
Most loans, however, are locked in for shorter terms. The vast majority – around two thirds – of the outstanding fixed-rate loans have a term of less than two years. Around one in five is fixed for 2 to 3 years. Only 10 percent of the fixed loans have a term of more than three years.
And there are still many offers for one- and two-year fixed loans with a “1” in front of them, even though Westpac raised short-term fixed rates by 0.1 percent this week.
“In short,” summarizes Kent, “some new fixed rates have been increased slightly, but the impact on general financial conditions is minimal”. In addition, “the shorter-term interest rates, including those on floating-rate loans, which make up the bulk of the loan, will remain low until the bank’s inflation targets are met.”
So that’s good news. But if, like me, you are very serious about prefixing a home loan with a “1”, I would still suggest that it is time to go shopping.
With fixed prices, of course, you never know. Fixed interest rates could fall even further if the global or domestic economy were hit by a new catastrophe. And setting your interest rate usually limits the additional repayments you can make during the fixed term. If you choose to interrupt the fixed term, you could incur significant interruption costs.
Then there’s the regular hassle and expense of refinancing, such as government fees for repaying and registering a new mortgage, which are hundreds of dollars.
But if you’re serious about getting some serious mortgage savings, I think it’s time to take it a step further.
- The advice in this article is general in nature and is not intended to influence readers’ decisions about financial products. You should seek your own professional advice before making any financial decisions.
You can follow Jess’s budget and money adventures on Instagram at @moneywithjess and subscribe to her free weekly email via the Sun Herald here and the Age here.