Why I blocked my mortgage for two years at 1.84%


The tide is turning in the fixed interest rate market for home loans, and it’s time to take action if you too want a “1” up front. But there is also no need to panic completely – interest rates, in general, are going to stay low for some time to come, for the reasons I will discuss.

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Recent movements in the new mortgage market were summed up this week in a speech by Deputy Reserve Bank Governor Christopher Kent.

Most newsworthy, Kent confirmed that our central bank is on the verge of deactivating a special funding facility it established at the start of COVID-19 to ensure cheap funding for banks.

The so-called “term finance facility” allowed banks to collectively borrow $ 200 billion at the ultra-cheap rate of 0.1% for three years. Banks and other lenders are currently busy maximizing the funding available under the program before it expires on June 30.

There has been speculation that the end of the facility would prompt banks to revise their fixed interest rates for new borrowers.

But Kent says there’s no reason to panic.

In reality, the TFF was only one of the means by which the Reserve sought to keep lending rates low. Others include keeping the official cash rate near zero, giving explicit “forward-looking indications” to markets that it does not plan to increase that cash rate until 2024, its bond purchase program. Government and its explicit goal of keeping all three one-year government bond rates at 0.1 percent.

“Combined, these measures have lowered interest rates across the economy from what they would have been otherwise,” Kent said.

Yes, that’s right, four-year fixed rates preceded by a “1” have disappeared in recent months.

But this, according to Kent, owes more to a global reassessment in financial markets of the inflation outlook, than to the end of the TFF. And anyway, “fixed rate loans with these longer maturities only represent a small portion of all loans.”

Australians have fallen in love with fixed interest rates during COVID, thanks to ultra-cheap deals. About 30 percent of all Australian home loans outstanding are now on a fixed term, up from just 20 percent a year ago.

But most of the loans are fixed for shorter terms. Among the outstanding fixed-rate loans, the vast majority – around two-thirds – has a maturity of less than 2 years. About one in five people is fixed between 2 and 3 years. Only 10% of fixed rate loans have a term of more than three years.

And there are still plenty of one- and two-year fixed loan offers with a “1” in front, despite Westpac raising short-term fixed rates by 0.1% this week.

In short, Kent concludes, there has been a slight increase in some of the new fixed rates, but the effect on broad financial conditions is minimal. In addition, “shorter-term rates, including on variable rate loans which constitute the bulk of credit, will remain low for as long as it takes to meet the bank’s inflation targets.”

So that’s good news. But if you – like me – are very serious about getting a home loan with a “1” in front of it, I still suggest it’s time to go shopping.

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Of course, you never know with fixed rates. Fixed rates could fall further if another calamity hits the global or national economy. And setting your rate usually limits the additional repayments you can make during the term. If you choose to break the fixed term, you may experience significant breakage costs.

And then there are just the usual hassles and costs associated with refinancing, like government fees for discharging and registering a new mortgage, which run into the hundreds of dollars.

But if you’re serious about mortgage savings, I think it might be time to move on.

  • The advice given in this article is general in nature and is not intended to influence readers’ decisions about financial products. They should seek advice from their own professional before making any financial decisions.

You can follow Jess’ budget and money adventures on Instagram at @moneywithjess and subscribe to his free weekly email via the Sun-Herald here and age here.


About Christopher Easley

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