Cash rate predictions mean fixed home rate shunned

by AB03 Mar 2014
A monthly Reserve Bank survey of Australia's leading economists showed a unanimous agreement that the official cash rate will remain on hold next week – and borrowers seem to be reacting by shunning fixed rate home loans.

The survey of 10 Australian economists – carried out by comparison website – predicted no rate change on Tuesday at the Reserve Bank’s board meeting next week, with most expecting no movements until the end of the year or early next year.
Finder money expert Michelle Hutchison said many borrowers are choosing to ride out the low variable rate wave but could miss out on bigger savings by not fixing their home loan.
“With every economist in our survey expecting that the Reserve Bank will leave the cash rate at 2.5% next week, and home loan interest rates at record lows, it’s no wonder we’re seeing borrowers sticking with variable rates.
The proportion of fixed rate home loans out of all loans financed is among the lowest levels in the past year – 16.8% in December 2013, according to Finder’s analysis of Australian Bureau of Statistics Housing Finance figures.
“There has been a decline in the number of fixed loans financed, with a drop of 17% since its peak in May 2013, when the number of fixed loans financed reached a five-year high of 10,631,” said Hutchison.
“We’re also seeing higher demand for variable rate home loans…with the proportion of variable home loan traffic up 15% since July 2013.”
Hutchison said her biggest concern is fixed rates are starting to rise and borrowers may miss out on securing a low rate if they want to fix their home loan later.
According to Finder, the average three-year fixed rate has increased by 0.16 percentage points to 5.11% since September 2013. However, three-year fixed rates are still lower than variable rates on average, at 5.39%.
“For a $300,000 home loan, borrowers could potentially save almost $2,000 in three years by fixing at the average rate of 5.11% compared to the average variable rate of 5.39%,” said Hutchison.
“And if our survey of economists is correct and the cash rate increases within the next year, borrowers who fix could save even more.”