Fixed rates on the move – Sign of times to come?

There has been a lot of “will they, won’t they” speculation about the RBA’s cash rate announcements. Interest rates are big news as they have a significant impact on the financial decisions we face, so what does it mean that fixed rates are on the move?

Recently, we’ve begun to see some movements for the fixed interest rates, with a number of lenders starting to cut their fixed ratesⁱ after many years of rises (and some stagnation) in anticipation of a future rise to comeⁱⁱ.

To understand the current landscape, it’s essential to grasp how interest rates work. The Reserve Bank of Australia (RBA) plays a crucial role by setting the cash rate during its regular meetings. The cash rate is the interest rate on overnight loans between banks and is a key tool for managing inflation and economic growth. When the RBA changes the cash rate – either raising it to combat inflation or lowering it to stimulate the economy—these adjustments ripple through the financial system.

However, fixed interest rates are a bit different. While variable rates fluctuate with the cash rate, fixed rates are determined by individual banks based on their expectations of where the cash rate is heading in the future.

The current trend of fixed rates declining

In recent months, we’ve started to see a decline in fixed interest rates across some providers. So, what’s contributing to this shift?

Inflation trends:

While inflation surged during the pandemic, there are signs that it is stabilising and even declining. With inflation expectations easing, banks may feel more confident in offering lower fixed rates.

RBA’s role and commentary:

The RBA has adopted a cautious approach, being very open about its commitment to stabilising inflation as its major focus. Changes to the cash rate by the RBA are a powerful lever in bringing inflation down. The RBA has stated their objective is to get consumer price inflation (CPI) back down to between 2 and 3 per cent and the trend is now heading in that direction.

This kind of shift signals to banks that the environment may become more favourable for borrowing, prompting them to reduce fixed rates in anticipation of a better lending landscape.

Increased competition:

The mortgage market is highly competitive, with lenders eager to attract borrowers. As banks compete for your business, lowering their fixed rates can be a way to gain an edge. This is good news for borrowers, as it leads to more attractive options in the market.

Considerations

It all means fixed rates are becoming relatively more attractive to borrowers, but the question is whether the initial moves are enough to shift the market somewhat away from variable rates.

With the cash rate still on ice for now, more than 95 per cent of home lenders are opting for variable deals. This is a remarkable difference from the height of the pandemic, when fixed rates accounted for as much as 46 percent of loans issued.ⁱⁱⁱ

If you are thinking of taking on a fixed rate loan or refinancing to a fixed rate it’s important to consider timing. Interest rates can fluctuate, the landscape remains dynamic, and predicting their movement can be challenging.

It’s also important to weigh up the pros and cons of fixed versus variable loans. The beauty of fixed rate loans is the stability in repayments protects you from rising rates and simplifies budgeting. So, for those who value or need that certainty – say your debt level is high, your cash flow position isn’t strong, and you want to take some risks off the table – fixed rates can be a viable approach. Lower fixed rates can also lead to significant savings; however, you do need to consider that it is likely to be early days for fixed rate movements and you may miss out on further savings should rates continue to fall, when the cash rate is revised downwards. Additionally fixed loans often have limited flexibility regarding extra repayments or early exit fees.

In any case, whether you’re a first-time buyer or looking to refinance, it’s good to stay informed as understanding the current climate can empower you to make the best decisions for your financial future.

We can help you navigate this evolving landscape and make the most of the options available to you.

i https://www.brokernews.com.au/news/breaking-news/more-lenders-slash-fixed-rates-285569.aspx

ii Mozo Banking Roundup September 2024 | Mozo

iii Why borrowers are choosing variable over fixed rates | Brokernews