When the Reserve Bank (RBA) last cut the cash rate in November many lenders didn't have the capacity to cut variable rates, and instead started offering rock-bottom fixed rates, some even below 2%.
Lenders have been able to do this partly as a result of the RBA's Term Funding Facility (TFF), which provides funding at interest rates of either 0.10% or 0.25% over three years.
This facility has also allowed many lenders to offer cashback offers to entice borrowers to refinance to a fixed rate loan with them.
The TFF expires in June, and although the central bank has said it won't raise the cash rate before the end of 2024, many economists and lenders are betting it will have to hike before then.
All of this may seem irrelevant to borrowers who have fixed their home loan and assume they're safe from interest rate rises.
But when a fixed rate period ends, borrowers are switched onto lenders' standard variable rates (SVR), which are often much higher than the variable rates lenders advertise.
This is called a revert rate, and Chief Financial Officer at non-bank lender Firstmac James Austin said this switch posed a serious risk to borrowers in a few years.
"Rates will reset to the banks' SVR, currently around 4% ~4.5%. By the end of three years the cash rate is anticipated to have risen to around 0.50%, taking these SVR to 4.5% ~5.05%," Mr Austin told Savings.com.au.
"That is a huge jump from the current 1.99% fixed rates on offer. This may well challenge the serviceability of many borrowers."
But Mr Austin, who forecast the RBA may hike the cash rate by the end of next year, said borrowers should reconsider fixing.
"The short term sugar hit from cash upfront will translate to higher rates in the future," he said.
Commonwealth Bank recently hiked two of its four year fixed-rate home loans, and some in the industry have started speculating the big four lender believes the RBA will hike rates sooner than expected.
Buying a home or looking to refinance? The table below features home loans - fixed and variable- with some of the lowest interest rates on the market for owner-occupiers.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure | ||||||||||
5.69% p.a. | 6.16% p.a. | $2,899 | Principal & Interest | Fixed | $0 | $530 | 90% |
| Promoted | Disclosure |
"False sense of security"
AMP chief economist Dr Shane Oliver said many borrowers didn't realise their repayments could dramatically lift when the fixed term ended.
"The main danger is in being lulled into a false sense of financial security on the back of the ultra-low fixed rate and not allowing for a possible lift in interest payments if there is a reversion to a much higher variable or even fixed rate when the initial fixed rate ends," Dr Oliver told Savings.com.au.
"The key is to make the most of the low rate to get the mortgage down faster than otherwise, e.g. by paying the same amount into your mortgage as if you are still on a higher variable rate."
However, Dr Oliver said fixing a home loan was still a viable option for many borrowers, and urged people to consider a split-loan.
"Fixed rates are generally well below variable rates and so the interest saving should be taken advantage of, particularly if the savings are used to pay down the mortgage principal faster," he said.
"A sensible approach is to leave some variable though to provide some flexibility."
Dr Oliver added he believes the RBA will hike the cash rate in the second half of 2023, allowing the central bank to meet its employment and inflation objectives earlier than expected.
Photo by Syed Hadi Naqvi on Unsplash
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