Finance expert David Koch is urging Australian borrowers to be careful when switching to a fixed-rate loan, even if they are now offering much lower rates.
The former Sunrise presenter warned that interest rates could soon fall dramatically, and anyone stuck on a fixed rate could be left behind.
It comes after ME Bank cut its two-year fixed rate to 5.79 per cent. significantly lower than the typical 6.5 per cent standard variable rate from major banks.
None of the big four banks offer a fixed rate as low as ME Bank and Commonwealth Bank, Australia’s largest property lender, offers a fixed rate of 6.59 per cent.
But Koch, who is now economic director at Compare the Market, said borrowers who locked in a lower fixed rate now would miss out if the Reserve Bank started cutting interest rates later this year.
Finance expert David Koch is urging Australian borrowers to be careful when switching to a fixed-rate loan, even if they have much lower rates (pictured with his wife Libby).
“While these fixed rates below 6 percent may seem tempting, it may be better to wait for a rate cut,” Mr. Koch said.
“Fixed home loans are great for protecting you from rate rises, but they will prevent you from getting a rate cut.”
The Reserve Bank raised interest rates for the 13th time in 18 months in November, but analysts now expect the RBA to begin cutting rates from the end of 2024 and into next year, leading to lower mortgage rates. lower variables.
If the Commonwealth Bank’s variable rate fell from 6.49 per cent to 4.99 per cent, the average borrower would see their monthly payments fall from $3,780 today to $3,210 by mid-2025.
For a borrower with an average mortgage of $598,624, monthly payments would be reduced by $570, or $6,840 a year, by June next year, according to the latest official loan funding figures.
Hopes for a rate cut have been fueled after February’s monthly inflation rate of 3.4 per cent was only marginally above the Reserve Bank’s target of 2 to 3 per cent.
In the 30-day interbank futures market, the RBA has cut rates from October by 25 basis points, with further cuts also expected in 2024 and 2025.
The Commonwealth Bank expects six cuts by the middle of next year to mark the most generous concessions to mortgage holders since the global financial crisis of 2008 and 2009, and the first relief since the Covid pandemic in 2020.
Three rate cuts in September, November and December would see the RBA cash rate fall from an existing 12-year high of 4.35 percent to 3.6 percent in December for the first time since May 2023.
This would be followed by three more rate cuts in the first half of 2025, which would see the RBA cash rate fall to 2.85 per cent for the first time since December 2022.
But that could leave even those with an ME Bank fixed-rate mortgage of just 5.79 per cent, over two years, paying much more than those with variable-rate loans, even if it is now cheaper in the short term. .
This product is available to those with a mortgage deposit of at least 20 per cent.
If those predictions of a rate cut came true, borrowers who locked in their rates now would be in a similar position to borrowers who in early 2008 locked in their mortgage rates following two rate hikes earlier that year.
Rates had reached a 12-year high of 7.25 percent in March 2008, but as the global financial crisis worsened later that year, the RBA cut rates from October 2008 to March 2009 to a record low of 3 percent.
The warning came after ME Bank cut its fixed rates by 60 basis points on Friday, taking its lowest owner-occupier rate to just 5.79 per cent (pictured houses in Ipswich, southwest of Brisbane).
The 30-day interbank futures market has the RBA cutting rates from October by 25 basis points, with further cuts also expected in late 2024 and 2025.
Koch said this story demonstrates the wisdom of looking for a more competitive variable rate instead of locking in a mortgage.
“History tells us that it is generally better to remain a little flexible and consider staying on a variable rate when we are at the peak of the cycle and rates are trending lower,” he said.
“It just depends on whether you want to take a risk with a higher variable or whether you prefer to lock in a stable rate that you think you can afford.”
During the Covid pandemic, fixed rate mortgages offset almost 40 per cent of mortgage loans in early 2022, when RBA interest rates were still at a record low of just 0.1 per cent and banks were offering fixed rates starting with a ‘two’.
But by February 2024, they accounted for just 1.4 per cent of all mortgages, new financial data on lending from the Australian Bureau of Statistics released on Monday showed.