Australia’s interest rate is forecast to fall from 4.35% to 3.6% by this time next year, prompting seven lenders to cut their rates this week
Lenders have started lowering their mortgage rates en masse influenced by expectations of future interest rate cuts by the Reserve Bank – moves that could tempt borrowers to restructure their home loans.
The downward drift in rates is especially prevalent in fixed loans, with seven lenders cutting their rates by an average of 0.3 percentage points over the past week, according to Canstar. Four lenders cut variable rates by smaller margins.
Many two- and three-year fixed loans are now priced at a full percentage point below standard variable rates, which equates to four quarter-point rate cuts.
The chief executive at the broking group Finspo, Angus Gilfillan, said mortgage holders who fix a portion of their loan can lock in some immediate savings and still benefit from any future rate cuts.
“Given so many people are doing it tough and the cost of their home loan has gone up so much, this can be a really good strategy to get a saving straight away,” said Gilfillan.
“If you need to sell a property and break the loan, there can be break costs involved with a fixed rate, but it’s a pretty compelling price for customers who want certainty and a whole percentage off their home loan straight away.”
A handful of lenders started cutting their fixed rates in August and lowering deposit rates for savers, in a trend that has gathered pace.
Market participants forecast that the official cash rate will fall from 4.35% to 3.6% by this time next year, which has decreased funding costs for banks.
The projected fall in official rates rubs against Reserve Bank warnings that it does not expect “near term” cuts due to persistent inflation.
Many central banks around the world have started cutting rates aggressively, albeit from a higher starting point than in Australia.
In Canada, the central bank cut the benchmark rate three times in its last three meetings from 5% to 4.25%. New Zealand’s central bank reduced rates by 50 basis points on Wednesday to 4.75%, representing the second cut in as many meetings.
But volatile economic conditions have also routinely tripped up forecasters, with stronger-than-expected US jobs data denting chances of back-to-back 50 basis point cuts by the Federal Reserve.
Canstar’s data insights director, Sally Tindall, said the fixed rate cuts would help revive interest in refinancing, which she said had been “more or less losing steam since mid last year”.
“Expect the fixed rate cuts to continue rolling in over the next few months as we approach the tail end of the year and head towards a rate cut, potentially in the first few months of next year,” Tindall said.
Macquarie cut its fixed rates over the past several days, while National Australia Bank also repriced many of its loans, bringing it in line with rivals Commonwealth Bank and Westpac.
The cheapest two-to-five year fixed rates in the market are now just under 5.5%, according to Canstar.
Mortgage holders tend to lock in fixed loans when rates are falling because the rates are usually priced below variable loans. One downside to a fixed loan is that there tends to be limits on making additional repayments.
Broker data shows that during the recent rate-hiking cycle of 13 increases, few homeowners refinanced into fixed rates.
The series of hikes have meant home loan repayments now command more than a fifth of an average mortgage holder’s pre-tax income – double the percentage paid in the 90s.
Home repossessions in New South Wales have also hit decade highs, as more households tip over the financial cliff after being unable to hold out for a reduction in rates.
Rating agencies note that a resilient jobs market has helped keep arrears and bad debts from posing a broader financial risk to the economy.
The next move in interest rates will be influenced by the opposing forces of an uncertain global economy and “stubborn” inflation, according to Morningstar.
The rating agency said in its economic outlook that a rapid deterioration in the global economy “could force the RBA to pivot” and start cutting rates.
“But another hike can’t be ruled out either,” the outlook said.
“Observing the experience offshore, the last mile of the inflation battle is the hardest, and any stubborn stickiness could test the market’s narrative for cuts this year.” Jonathan Barrett Senior business reporter the guardian
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