It’s a guessing game

Effie Zahos sees a rate cut coming for home loan borrowers

Effie Zahos


THERE’S BEEN TALK THAT THE BIG four banks will do something they have never done before – cut their interest rates out of cycle with the Reserve Bank. As funding pressures ease around the world, the banks are under the pump to cut their interest rates.

While this may sound great, cynics argue that it is just a case of the banks playing catch-up. The Reserve Bank has cut the cash rate six times since November 2011, totalling 1.75%, but standard variable home loan rates have fallen by only 1.33% on average, based on RateCity’s database of more than 100 lenders. This difference, says RateCity’s Michelle Hutchison, has cost home owners around $80 in monthly repayments on a $300,000 loan.

With, at the time of writing, only two weeks to go until the Reserve Bank meets again, the idea of the big four cutting rates before then doesn’t look too promising.

Either way, you can expect interest rates to drop this year. Economists predict the official rate will fall from the current 3% to 2.25% – although some are less bullish and expect just one more cut to take it to 2.75%.

Alan Oster, NAB’s chief economist, says he has downgraded his economic growth forecast from 2.5% to 2% for this year because conditions are not improving.

Even if banks continue to pass on only about 80% of official rate reductions, it will leave home owners once again in an interesting situation. Do they sit on variable or do they lock in a fixed rate? Remember, of course, that history shows most of us get it wrong when it comes to locking in.

To answer this question you need to review your personal needs and take a good look at the facts.

At the moment borrowers can source a three-year fixed-interest rate as low as 5.09%. This is 0.9% below the current average standard variable loan. It’s important to note that you should be able to get a discount of up to 0.8% in the form of a packaged loan discount on the standard loan versus a package discount of just 0.2% on the fixed loan. Discounts do depend on lenders and the amount borrowed, but this perk could make a difference as to whether you opt to stay on variable.

Mitchell Watson, Canstar’s mortgage expert, points out that should borrowers not want to lock in an interest rate for the full three years, there are attractive one- and two-year fixed rates lower than 5%.

Maybe it’s comforting to know that more and more home owners are locking in – 14.3% of residential loans in November were fixed, the highest since May 2008.

“Borrowers looking to fix can take some solace in the fact that the average three-year fixed-interest rate is sitting 1.1% lower than the mid-term average variable rate [Jan. 2010, to Dec. 2012],” says Watson, “although it has been touted that variable rates will continue to decrease in 2013, with some commentators forecasting [total] cuts as high as 1% by the end of 2013.”

Guessing by how much interest rates will fall is just that – a guessing game. The outlook depends on variables over which you have no control. But you can control your repayments. By keeping them the same, a home owner with a $300,000 mortgage would have saved about $3000 in interest since rates began falling in November 2011 (depending on the mortgage product).

If you’re still unsure which way to go, most home owners have the option of splitting their loan between variable and fixed.

If you do change, be sure to factor in any costs, as they may outweigh the benefits.

Money’s editor has more than 19 years’ experience in the finance industry


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