Financial expert David Koch is urging Australian borrowers to be wary of switching to a fixed rate loan, even though they now offer much lower rates.
The former Sunrise host issued a warning that interest rates could soon fall dramatically and anyone stuck on a fixed rate could be left behind.
This comes after ME Bank cut its fixed rate to 5.79 percent, significantly lower than the usual standard variable rate of 6.5 percent from the big banks.
None of the big four banks offer a fixed rate as low as ME Bank, with Commonwealth Bank, Australia’s largest property lender, offering a fixed rate of 6.59 per cent.
But Koch, who is now economic director at Compare the Market, said borrowers now committing to a lower fixed rate would not benefit if the Reserve Bank began cutting interest rates later this year .
Financial expert David Koch urges Australian borrowers to be wary of switching to a fixed rate loan, even if they have much lower rates (he is pictured right with his wife Libby)
“While these fixed rates below 6 percent may seem tempting, it might be better to wait for a rate cut,” Mr. Koch said.
“Fixed home loans are great for protecting you from rate rises, but they will prevent you from getting a rate reduction.”
The Reserve Bank raised interest rates for the 13th time in 18 months in November, but analysts now expect major banks to cut rates at the end of 2024.
If the Commonwealth Bank’s variable rate fell from 6.49 per cent to 4.99 per cent, the average borrower would see their monthly repayments rise from $3,780 today to $3,210.
For a borrower with an average mortgage of $598,624, monthly repayments would fall by $570, or $6,840 a year by June 2025, based on the latest official loan finance figures.
Hopes of a rate cut were fueled after the monthly inflation rate of 3.4 per cent in February was just above the Reserve Bank’s target of 2 to 3 per cent.
In the 30-day interbank forward market, the RBA is cutting rates by 25 basis points from October, with further reductions also expected in 2024 and 2025.
The Commonwealth Bank expects six reductions by the middle of next year, which would be the most generous concessions to mortgage holders since the global financial crisis of 2008 and 2009, and the first relief since the Covid pandemic in 2020.
Three rate cuts in September, November and December would see the RBA spot rate fall from an existing 12-year high of 4.35 percent to 3.6 percent by December for the first time since May 2023 .
This would be followed by three further rate cuts in the first half of 2025, which would see the RBA cash rate fall to 2.85 percent for the first time since December 2022.
But it could force even those on ME Bank’s 5.79 per cent fixed rate mortgages to pay significantly more than those on variable rate loans, even if it is now cheaper in the short term.
If these predictions of lower rates come true, borrowers who locked in their rates now would find themselves in a similar situation to borrowers in early 2008 who locked in their mortgage rates after two rate hikes earlier this year -there.
By March 2008, rates had reached a 12-year high of 7.25 percent, but as the global financial crisis deepened later in the year, the RBA cut rates from October 2008 to March 2009 to a record level of 3 percent.
The warning came after ME Bank cut its fixed rates by 60 basis points on Friday, which saw its lowest rate for owner occupiers fall to just 5.79 per cent (pictured, homes with Ipswich, southwest of Brisbane).
In the 30-day interbank forward market, the RBA is cutting rates by 25 basis points from October, with further reductions also expected in late 2024 and 2025.
Koch said this story demonstrates the wisdom of seeking a more competitive variable rate rather than locking in a mortgage.
“History tells us that it is generally better to remain a little flexible and consider maintaining a variable rate when we are at the peak of the cycle and rates are largely tilted downward,” he said. declared.
“It just depends on whether you want to take a chance on a higher variable or whether you’d rather lock in a stable rate that you think you can afford.”
During the Covid pandemic, fixed rate mortgages have been almost 40 per cent of home loans at the start of 2022, when RBA interest rates were still at a record low of just 0.1 per cent and banks were offering fixed rates starting with “two”.
But in February 2024, they accounted for just 1.4 per cent of all mortgages, according to new Australian Bureau of Statistics loan finance data released on Monday.
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