Why it’s time to start thinking about locking in low rates

A potential Reserve Bank of Australia interest rate cut on Melbourne Cup Day could mark the termination of the so-called cutting cycle.

Most economists expect just one last cut in this cycle, and after that consensus forecasts vary widely.

History suggests the banks won’t wait around for the RBA to change course. Instead they may quickly move fixed rates higher in the near future.

Just now fixed rates are often lower than variable rates, but when rates are rising, fixed rates will always be higher than variable rates as banks insure themselves against rising costs.

“I do believe that we are coming to the end of the cutting cycle. Actually, we could be at the end already,” Sally Tindall, data insights director at Canstar, told The Australian’s The Money Puzzle podcast.

Given the right conditions, homeowners and investors will fix their rates in large numbers – almost half (46 per cent) of mortgages were being fixed at the peak of Covid’s rock-bottom rates in 2021.

Fixing rates for a set time means customers get the same interest rate over the term, but any move to change the rate can lead to extra costs for the borrower.

Since the Covid period, volumes of fixed mortgages have plunged. It is understood about 2 per cent of total mortgages were fixed in 2023, the last time official figures were released.

But homeowners who get in ahead of the next cycle stand to be winners with lower costs.

Tim Lawless, the head of research at the property research group Cotality, said the recent lift in unemployment had changed the mood in the markets and driven renewed speculation that a cut in November may be the last for a long time.

“It sounds like the RBA is probably getting pretty close to what they might describe as a neutral rate if we get down to around that sort of 3.3 per cent mark for the cash rate,” he said. “I don’t think the cycle has got much further to go than that.”

The RBA cash rate is currently 3.6 per cent. Official rates had run as high as 4.35 per cent at the top of the present cycle in November 2023.

“On fixed rates, we are definitely hearing a lot more talk about whether or not to fix it at the moment,” Mr Lawless said.

“You can get fixed rates that are lower than variable rates by more than 25 basis points. So I think more people are starting to do the numbers and weighing up the pros and cons.”

Fixed rates are still available at lower rates than variable rates, which range around 5.5 per cent, with the best deals coming from beyond the big four banks.

Ms Tindall mentioned two-year fixed rate offers from Unloan as among the lowest of the banks at close to 4.6 per cent, while Westpac is the standout among the majors with a rate close to 4.9 per cent. (Rates are subject to conditions and change regularly.)

“Most of the other fixed rates on offer from the big four are sitting there with a ‘five’ in front of them. So, if you are going to fix, go find yourself a good deal,” she said.

David Bassanese, chief economist at ETF provider BetaShares, is cautious. He believes money markets are still signalling more than one more rate cut.

“It may be a bit premature to call this, but the fixed rates are looking more attractive,” he said. “It’s hard to time these things perfectly.”

This article first appeared in The Australian as Fixed mortgage rates in the spotlight as end of RBA cuts nears