When the Reserve Bank of Australia (RBA) slashed the cash rate to 0.10% in November 2020, home loan rates plummeted to all-time lows.

As a result, it’s possible to get a home loan that starts with a ‘1’ – unthinkable, even a year ago.  

But that’s not the only strange thing that’s happened.

Most of the time, variable-rate loans are lower than fixed-rate home loans. However, this logic has been turned on its head over the past few months. Currently, variable rates are hovering in the mid-2s for owner-occupiers, whereas fixed rates are lower than 2%.

What’s going on?

Why fixed rates are lower than variable rates

To answer those questions, you have to first look at how variable-rate and fixed-rate mortgages are funded.  

Lenders generally fund their fixed-rate products by issuing bonds in the international money markets. Bonds are a form of long-term debt – so typically come with higher interest rates than short-term funding sources.

In contrast, variable rates are closely tied to the official cash rate – which is the rate the RBA charges on overnight loans between banks.

These different funding sources explain why the interest rate can rise or fall when you have a variable loan, whereas it stays the same for a set timeframe when you fix it.

Normally, differences between the two rate types reflect market expectations on what will happen to the official cash rate. So when:

• Fixed rates are lower than variable rates – the market believes the official cash rate will fall (as will variable rates)

• Variable rates are lower than fixed rates – the market believes the official cash rate will rise (as will variable rates)

But we aren’t living in normal times. RBA governor Philip Lowe has repeatedly gone on the record to say two things:

• Negative rates are “extraordinarily unlikely” in Australia

• The RBA is unlikely to raise rates “until 2024 at the earliest”

So this isn’t what’s going on here.

Rather, fixed rates are currently lower than variable rates because the RBA has provided cheap credit to the banks through something known as the Term Funding Facility (TFF).

What’s the TFF? 

The TFF forms part of the RBA’s monetary response to the pandemic. It allows lenders to borrow a combined total of up to $200 billion directly from the RBA for three years at the cash rate.

And it’s this cheap funding that has been one of the major factors pushing fixed rates down – particularly since November when the cash rate was cut to 0.10%.  

But, the TFF is winding up on the 30th of June 2021. And without this facility, it’s likely fixed rates will rise….

Fixed rates on the rise

In fact, they already are:

• Many lenders increased their 4-year fixed rates in the last few months – including NAB, Westpac and CBA (who actually increased their rate twice)

• CBA also recently hiked its 3-year fixed rate for owner-occupiers  – and where one major bank leads, others are likely to follow 

That raises the obvious question: “Should I fix my home loan before rates rise further?”

Unfortunately, there’s no ‘right’ answer – as it depends on your individual circumstances.

To fix or not to fix… 

Fixed-rate loans have their pros and cons.

Advantages in the current market include:

• Lower rates than a variable loan – which can cut your monthly repayments and save you on interest over the fixed period of your loan

• Easier to budget for – as your repayments won’t change throughout the fixed period

Disadvantages in the current market include:

• Less flexibility – fixed-rate loans typically cap or restrict additional repayments

• Fewer features – such as offset accounts and redraw facilities that can save you money over the life of the loan

• Costly break fees – should you decide to switch, sell your home or pay off your loan in full before the fixed period has ended.

An expert mortgage broker can help you work out whether fixing your home loan is the right move for you. Schedule a meeting with Alex over the phone, via Zoom or in-person today.