RBA Rate Cuts: The Death of the Fixed-Term Mortgage

In Australia, fixed-term mortgages are popular for their stable monthly payments, but upcoming RBA interest rate cuts could shake things up.

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For property buyers, the reduction of official interest rates is fantastic news. With less to pay per month, the rate cuts give mortgage borrowers a good reason to switch from fixed-term to variable home loans.

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A Game Changer for Borrowers

The Reserve Bank of Australia (RBA) is taking a neutral policy stance to control the inflation rate and avoid economic shocks. The cash rate is currently kept at 4.35%; however, Commonwealth Bank (CBA) Australian Economics head, Gareth Aird, thinks the RBA will begin lowering interest rates by June and possibly more in August of 2024. 

What You Might Want to Know About the RBA Rate Cuts

  • Will the RBA Cut Rates in 2024?

The RBA has not released an official statement about the timing of rate cuts this year. However, economists forecasted that cuts might occur between June 2024 and February 2025, with a possible reduction of around 0.75%.

  • What is the Next RBA Cash Rate?

The RBA is currently keeping the cash rate at 4.35%, but the next meeting and official cash rate will be announced on 7th May 2024.

  • What are the Predictions for Interest Rate Cuts in 2024?

Several banks have made varying predictions about the possible RBA rate cuts:

  • Commonwealth Bank has an aggressive forecast of three to six total reductions.
  • Westpac and National Australia Bank predict five reductions.
  • Australia and New Zealand Banking Group (ANZ) forecasts only three reductions.

While many economists predict the first interest rate cuts to happen this year, a minority of speculators say 2025 is a more realistic period for the RBA to reduce rates.

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The expected rate cut has a large impact on the mortgage market. With the anticipated drop in interest rates, more people are expected to choose variable-rate loans. Variable-rate mortgages have rates that change over time depending on economic conditions. If the RBA does slash interest rates, variable-rate loans would enable borrowers to save money.

Unfortunately, fixed-rate mortgage rates – where the interest rate stays the same for a set period – may become less popular. News about the possible rate cuts has turned fixed-term loans into a double-edged sword. While fixed-term mortgages are protected from interest rate hikes, borrowers do not exactly get to enjoy lower monthly repayments when rates fall.

Besides the expected rate cuts, borrowers are choosing variable-rate loans over fixed-term because of the following:

  • Fixed rates typically hinder how quickly the loan is paid off. Borrowers might be charged a break fee if they finish too early.
  • Borrowers are at risk of mortgage cliffs, which may result in struggles to pay dues. Cliffs occur when very low fixed-term loans expire and shift to higher variable rates.
  • Fixed-rate loans do not have offset accounts, meaning borrowers cannot link their savings account to the loan to “offset” the balance and reduce interest. Variable-rate mortgages are best for borrowers who need offset features.
  • Uncertainties in the Australian economic landscape led borrowers to need flexibility in their payments. Variable-rate loans allow early payments and easier refinancing.

CBA economist Stephen Wu reported that there was almost no new fixed-term lending in December. Only 7.5% of new loans have been written at fixed rates since the RBA began its hiking cycle in May 2022.

Sally Tindall, Rate City research director, adds, “In the last couple of weeks, we’ve seen more cuts to fixed rates. The appetite for fixing among borrowers could not be lower. It’s the lowest proportion in a while.”

Navigating the Mortgage Rate Dilemma

The slow demise of the fixed-term home loan poses a dilemma for borrowers torn between stability and flexibility. With the possibility of mortgage rate cuts soon, borrowers must carefully weigh their options before settling on a decision.

Fixed-term mortgage rates offer predictability and certainty in payments, but they can also be a trap if rates continue to drop. Meanwhile, variable-rate loans provide flexibility but also come with the risk of a rise in monthly dues should interest rates suddenly skyrocket.

Keep in mind that while there is speculation about rate cuts, the timing remains uncertain. If you are hesitant about what type of mortgage to get during these erratic times, don’t hesitate to seek the advice of a professional mortgage broker.

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Thomas Makin

Thomas Makin is the Principal Mortgage Broker and Co-Founder of Scale Mortgage. He has a Diploma in Finance and Mortgage Broking Management and is accredited by the Mortgage & Finance Association of Australia (MFAA).

Thomas is known for his skill in providing tailored mortgage solutions. He helps homebuyers and investors across Australia, showing a strong commitment to professionalism and high industry standards.

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