Why it’s now or never for fixed rate mortgages

If you’re flirting with the idea of a fixed rate home loan, now may be your last chance to get a killer deal.

A recent surge in the cost of funding term loans has triggered a wave of repricing in the fixed rate mortgage market in the past week.

In a sign that the current low rate cycle may have bottomed, the cost to banks and credit unions of raising funds for three years or more to lend to fixed rate home borrowers has spiked.

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Unlike variable rate mortgages that are linked to the Reserve Bank’s monthly decisions on the cash rate, fixed rate mortgages are priced according to movements in rate benchmarks in the money market.

In Australia, those benchmarks include so-called “bank swap rates”.

Since the middle of this month those rates have risen sharply from record lows, and are now adding to lenders’ funding costs.

While the RBA’s official cash rate was reduced to two per cent at its May board meeting, the cost to banks of borrowing for up to three years on fixed terms in the money market has risen more than 0.2 per cent to 2.25 per cent since April.

If lenders want to raise funds for five years on fixed terms they have to pay a rate of at least 2.62 per cent.

Lenders are now in the process of passing these higher costs to new fixed rate borrowers.

Fixed rates already rising

Reserve Bank of Australia

Rate cuts do not have the same effect on fixed rate mortgages as they do on variable rate ones. Photo: Getty

It hasn’t taken long for home lenders with rates at the sharp end of the fixed rate mortgage market to respond to these cost rises.

In the past week, lenders who were previously marketing the cheapest fixed rate mortgages in four decades have bumped up their pricing on three-, four- and five-year fixed loans.

Many of these lenders had been operating on thin profit margins and have had to reprice to keep their fixed lending books on a sustainable footing.

Financial services research house, Mozo, has compiled the following list of lenders that have increased their fixed rates this month.

• Macquarie Bank – increased fixed rates on four- and five-year loans by 0.25 per cent

Homestar Finance – hiked rates by 0.15 per cent on three-, four- and five-year mortgages

Members’ Equity – lifted five-year fixed rates by 0.5 per cent.

AMP Bank – five-year fixed rate has risen by 0.34 per cent.

Arab Bank – five-year fixed rate up by 0.4 per cent.

QT Mutual – three-year fixed rate up by 0.3 per cent

The following is a table of the fixed rate offers of these lenders after the increases.


Most of these lenders are still competitively priced after the hikes, but mortgage brokers told The New Daily that demand for fixed rate mortgages has begun to wane after the RBA’s latest official rate cut.

Until the middle of this month, most of the lenders mentioned above were selling some fixed rate mortgages at less than four per cent.

This meant that borrowers could fix their home loan rate almost one per cent below the average variable rate at the time.

But that discount is now diminishing.

“Until the official rate cut earlier this month, mortgage brokers were reporting solid growth in demand for fixed rate loans,” said Mark Haron, a director of the Connective mortgage broking network.

“Some borrowers are still keen to fix, but the demand has cooled a little since the RBA cut rates on May 5.”

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According to Mozo’s home loan tables, the average price of a variable rate mortgage in Australia is 4.73 per cent after the RBA rate cut.

Mozo director Kirsty Lamont said the discount of fixed rate mortgages to standard variable rates was likely to reduce further.

“Right now it’s still possible to fix a home loan at under 3.5 per cent but the number of loans at this level is decreasing and we are seeing rates at the sharper end of the market starting to go up,” she said.

“I think we have hit the bottom of the current cycle on fixed rate loans and more lenders are going to start raising rates over coming months.

“My advice would be that people thinking about fixing should do it sooner rather than later because the record low fixed rates may not hang around much longer.”

Mr Haron said the recent spikes in money market rates indicated that the recent period of tapering interest rates might be coming to an end.

“The swap rates for three years and beyond have risen sharply in the last three weeks,” he said.

“There is a consensus in the market that we may have reached the bottom of the fixed rate cycle.”

What to do

* If you have been flirting with the idea of fixing your home loan, now is probably the time to make your decision one way or another because fixed rates appear to have bottomed.

* Before taking out a fixed rate loan be aware that most lenders impose a cap on the amount of the loan you can pay off without incurring special charges.

* Fixed rate loans are appropriate for borrowers who do not expect to pay off their home loan early and want the certainty of regular monthly repayments.

* Consult a mortgage broker to determine what type of mortgage is best for your circumstances.

* You can inspect Mozo’s fixed rate mortgage table here.

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