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How did the government influence fixed rates?

The Reserve Bank of Australia (RBA) cut variable rates by a total of 0.5% in March 2020 in response to the Coronavirus outbreak. The lenders passed on some, but not all of this drop in rates with most choosing to pass on 0.25% in total.

But, the question is: how did fixed rates drop below variable rates?

The government issued cheap 3 year bonds to the banks which significantly reduced the cost of funds for fixed rate loans compared to variable rate loans. This is an oversimplification, but effectively it’s much cheaper for banks to offer fixed rate loans than it was in 2019.

If fixed rates are low, won’t rates be falling?

Historically, if the fixed rates are below variable rates for home loans,this is an indication that the money market is predicting interest rates to fall. If they are higher, the money market is predicting rates to increase.

The official RBA cash rate currently sits at 0.25%,which again is the lowest in Australian history. The RBA could possibly do one more rate cut, but most economists think this is very unlikely.

Since the RBA is anticipating significant job losses and income disruption due to the extended lockdown, it noted that the cash rate could remain low for quite some time.

“Members supported the proposal and agreed that the cash rate would not be increased from its lower level until progress is made towards full employment and there is confidence that inflation will be sustainably within the 2-3 per cent target range,” the RBA noted.

Are break fees a risk?

A break fee is a fee that you may pay if your exit your fixed rate loan early by refinancing, selling your property or paying out your loan. You may also pay it if you pay too much off of your loan although the limits vary between lenders.

This is to reimburse the lender for their economic loss as they have borrowed the funds at a fixed rate as well.

As the Australian Government has given cheap fixed rate loans to the banks, it is very unlikely that the lender will have an economic loss if you repay your loan early. For this reason, the risk is reduced, as the lender may actually benefit if you repay your loan early.

There are no guarantees but we consider it to be a much lower risk than normal. We still wouldn’t recommend that you fix if you need the flexibility to pay off your loan early.

So is fixing a good idea?

From an interest rate point of view yes, fixing is cheaper than variable and it’s unlikely that variable rates will drop to the level that fixed rates are at now.

However fixing might not be the right option for everyone. Please read our page ‘Should I fix my home loan?’ for more information about the risks and restrictions of fixing your loan.

If you still need help to determine if fixing your home loan is right for you, talk to our award-winning mortgage brokers.

They are safely working from home, and can help you with any queries you have. Call us at 1300 889 743 or fill in a short assessment form.