RBA rate cuts raise question of locking in home loan
There are many more savers in Australia than there are home loan borrowers, but when the RBA cut official interest rates by a quarter of a percentage point to 2.5% last month the focus was well and truly on home loans.
A glum RBA forecast points to more rate cuts, which raises the question for homeowners: is now the time to lock in?
According to Canstar's database, the lowest three-year fixed rate is 4.73% for a standalone loan, or 4.64% if you take out a packaged home loan. The average standalone three-year, fixed rate from the big four is 5.12%, or 4.97% packaged.
With the average standard variable rate from the big four sitting at 5.88% (5.08% packaged), there's a cost saving of $x per month in repayments between the highest variable rate and the lowest three-year fixed rate for a $300,000 mortgage. Of course, you do need to factor in refinancing costs, application fees and any fixed-rate cost guarantee fees before you take the plunge.
The reality for most homeowners is that there is a marginal difference between the variable rate and fixed rates that their existing lender has to offer. The cheapest fixed rates are not coming from the majors.
While Canstar says fixed rates are currently sitting on average 0.39% lower than standard variable rates, it could take as little as two RBA rate cuts of 0.25% to reverse the potential savings of locking in.
That's the risk with fixing your loan, but whether or not you end up paying a premium for locking in, it's a small price to pay for certainty - and that's what locking in is all about. Hedging your bets with a part fixed, part variable loan may be the way to go, but these days most lenders do allow extra repayments on fixed loans of up to $20,000 without any penalty. Just don't expect offset to come with your fixed loan.
As for savers, the news isn't as good, which is why the chase for yield is pushing bank share prices to record highs. Bank shares may be on the pricy side, but with reliable dividend income streams of 5%-plus investors are thinking twice as to where to stash their cash. Of course, cash is safer then shares, so if this is your preference you need to be earning a rate of at least 2.5% on your deposit if you want to keep ahead of inflation.
Alex Parsons, CEO of RateCity, says rates upwards of 4% are still available, so there is no excuse not to keep your money well ahead of rising living costs. Parsons suggests looking for bonus rates awarded for certain behaviours, such as making a certain number of deposits every month or no withdrawals. Keep an eye out for introductory rates too - but be prepared to switch banks every time the higher rates run out.
"It's a good idea to set a reminder in advance and then do your homework by comparing the best available deals," he says. "At the very least call your existing bank and negotiate - you have nothing to lose other than your savings income!"
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